Unit linked insurance plans or ULIPs were the flavor of the season 6-7 years back. The market was cruising and so were the sales agents surpassing their targets to achieve hefty commissions. In fact, holding a ULIP was considered cool. After some time, everything heated up. People began understanding the true face of the product when it failed to deliver even when the markets were going great. When the markets dipped, you can imagine the plight of the investors of ULIPs.
This was primarily because of the huge defects in the structure of the product itself. It managed to deliver returns but could not pass it on to the customers due to the high charges involved. Allocation charges, administration charges, fund management charges and mortality charges ate way all the returns made by ULIPs. People got frustrated with the agents and started hating the word ULIP. But, time has changed a few things here.
Now, ULIP looks a better product from an investor’s perspective. Here are three reasons why you should consider buying a ULIP now:
1) Lesser Charges
IRDA has capped the annual charges on a ULIP to 2-2.5% p.a. for the first ten years. This is significantly lower than what it used to charge few years back. It is also on par with the average charges of a mutual fund. This increases the potential for an investor to earn returns from ULIP. Fund management charges have also been capped at 1.35% p.a.
2) Tax Advantage
Not all mutual funds offer tax benefits. Maturity amount from equity mutual funds is taxable at flat 15% if withdrawn before one year. However, the maturity proceeds of ULIPs are totally tax free.
(Also see: Taxation of Mutual Fund Schemes)
3) Portfolio Switches
Some of the ULIPs now allow unlimited number of switches in the fund. Switches can be used to re-balance your portfolio during market ups and downs. Some of the ULIPs offer limited switches and charge a certain amount for additional ones. This option differentiates ULIPs from Mutual Funds where switches are done according to fund manager’s choice and investors do not have much say in it.
These things make ULIPs an attractive investment product. However, the benefits of ULIPs can be reaped only when held for long term i.e. at least 10 years. Also, ULIPs attract mortality charges for the insurance amount offered. If you do not need much insurance at this point in time, you can opt for a product with lesser insurance so that mortality charges are lesser.