Investment in ULIP is eligible for deduction under section 80C (life insurance) or 80CCC (pension) of Income Tax Act. A maximum of Rs 1,50,000 is allowed under section 80C/ 80CCC. ULIP is an integrated product of ‘insurance and investment’ developed and marketed by life insurance companies. ULIP offers the investors the advantage of both insurance and investment under the single plan. In this integrated scheme of investment and insurance, a part of the premium paid by the policyholder is utilized for insurance cover and rest of the premium portion is utilized for the investments in various equity/debt schemes. The average category return of small and midcap ULIP funds is 16%, which is only slightly lower compared to their mutual fund counterparts.
(net return was around 13-14% after deductions of charges by Funds Managers) return in 2017-18.
How it works:
The face value of ULIP policy is indicated in units. The units of ULIPs are allotted on the basis of premium paid by the policyholder. These units have Net-Asset-Value (NAV) which is determined by the net rate of returns on money reinvested by funds manager in equity/debt related instruments. The investors who are shy to invest in equity-related policy have the option to go for a policy of fully investing in debt funds. The policyholders have the option to switch from one fund to other. They may switch the money from debt funds to equity funds or from equity funds to debt funds at later date. The advantage of switch facility available to Policyholders of ULIP is that they can switch the funds without the risk of levy of any capital gain tax.
Caution: You must remember that the money invested in ULIPs is associated with market risk. Any loss in the investment made by the fund’s manager is borne by the policyholder. Even a fund which is showing very good performance at present may end with disappointing returns at a future date. Investors who have the appetite for risk could consider the option of investing in ULIPs.