The re-introduction of the Long-Term Capital Gain (LTCG) Tax in the Union Budget 2018 has made ULIPs one of the favourite instruments amongst the investors. As of now, 10 percent on gains realised in excess of Rs 1 lakh earned from stocks and/or equity-based mutual funds will get taxed. However, investing in equities through ULIPs will not attract any tax, as realised gains will get exemption under the section 10(10D) of income tax act, said Santosh Agarwal – Head of Life Insurance, Policybazaar, in a recent interview with Moneycontrol.
She spoke about how new-age ULIPs (4th generation) are becoming a low-cost and easy to understand product.
Here are the key takeaways from Agarwal's interview:
Difference: New-age ULIPs vs previous generation ULIPs
The era of new-age ULIPs has been started with several charges being reduced. Not only this, most insurance companies are reversing the cost of risk of life cover (mortality charge) also. Compared to today’s 4th generation ULIPs, the previous 2nd and 3rd generations ULIPs which were floated in the market post-2010 and 2015 respectively were quite costly, the new-age ULIPs have now become cost-effective and incur negligible charges.
Top three benefits of new-age ULIPs
EEE Benefit: The Exempt-Exempt-Exempt tax structure applied on ULIPs makes it more attractive option and thus, encourages investors to invest in them. However, equity mutual funds are now categorised as Exempt-Exempt-Taxable (EET) as the interest earned and redeemed over and above Rs 1 lakh will now be taxed at 10 percent. This gives ULIPs an added advantage over mutual funds.
Switching options: Investors have the option to choose from a variety of investment options, they can choose equity over debt when the market goes up and vice versa when the market goes down. Also, depending on their future financial goals, investors can choose the option to get desired returns they wish to earn.
You can switch multiple times between your preferred choices of investments without causing any interruption in capital earnings. However, in mutual funds, you have to pay certain taxes while redeeming your money from debt/equity funds and switching it to another one.
Link to long-term financial goals: ULIPs helps in creating huge wealth over a period of time. You can link and accomplish any long-term financial goals like retirement, child education, wedding planning and house purchase. However, make sure that your goals’ time horizon should be more than five years as ULIPs come up with a minimum lock-in period of 5 years.
You may also read: Five must-dos before investing in ULIPs
Why are new ULIPs a preferred investment options for investors
The Insurance Regulatory and Development Authority of India (IRDAI) has now put a cap on several costs which are applied on ULIPs.
The new-age ULIPs are providing additional benefits to the customers like zero premium allocation charge and policy administration costs. Not only this, most insurers also reduced the life cover and fund management charges (FMC). The FMC is charged at around 1.35 percent. Hence, the expenses incurred on these 4th Gen ULIPs are much lower than MFs.
However, people are not aware of the new-age ULIPs like the Edelweiss Tokio’s Wealth Plus which actually returns the costs of life cover they charge (which is the mortality charge) from their customers to provide insurance coverage.
Why investor should go for online ULIPs
Online ULIPs are zero cost ULIPs as they do not incur any distribution cost and also, no commission is charged on them except the FMC charge and mortality charge which are applied as per the guidelines. Moreover, most of the companies are reversing the mortality charges. However, buying ULIPs offline - that is through an agency channel or banks - will entail agency or banks commission making the product little expensive.
Therefore, if you are little internet savvy, understand the product visiting various websites and buy ULIPs online and also, generate higher returns in long-run.