In today’s scenario , when we talk of
life insurance policies what immediately springs to our mind are ULIP’s. ULIP’s from life insurers have been the preferred flavour for a lot of people who wish to ‘invest through insurance’. The main attraction is the tax break under Section 80C of the Income tax Act, 1961.
ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities.
But if talk about pure tax saving schemes, then we have the option of investing in tax-saving funds/equity linked saving schemes (ELSS).Which offer similar tax benefits. An ELSS is a diversified equity mutual fund scheme where you have an option of making a one-time investment. It works like an open-ended diversified equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation for investors. The only difference between an equity fund and a tax-saving fund is that the latter has a 3-year lock-in and tax benefits under Section 80C.
Let us look at a brief comparison of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specific to the Indian market :
The similarities: For both ULIP’s and ELSS, you have to invest once and the investment is locked in for minimum three years. Under the present tax laws, what you get on maturity is tax-free. While in ELSS your entire investment will be in equity. ULIP’s give you the choice of investing in equity or debt instruments, or both, and the choice to move from one to the other.
The differences: The biggest difference is that ULIP’s give you a life cover, while ELSS does not. So in ULIP’s , the ‘mortality cost’ of insuring your life is deducted from the value of the fund every month. When the plan matures, the value of the units, or fund value, is yours. If a policyholder dies during the plan term, the higher of sum assured or fund value is paid to the beneficiary.
The tax benefits: Investments in ULIPs and ELSS attract tax benefits under Section 80C.
The costs: In an ELSS, the amount invested is subjected to only two charges. One is the entry cost or the load, which is normally 2.25 per cent of the amount invested. After the units are allotted, there are recurring charges also called the expense ratio. For ELSS, the average is around 2.25 per cent of the fund value, while the maximum permitted is 2.5 per cent.
For ULIP’s, first there is the premium allocation charge ,it ranges from 2 to 4.5 per cent for amounts below Rs 1 lakh, and goes down for higher amounts. Then there is fund management cost, which is similar to the MF recurring expense ratio. Further, there is the mortality cost, which is based on the difference between the sum assured and the value of the fund. Some ULIP’s also carrying a ‘surrender charge’ for exiting the plan in the fourth and fifth years as well. Then there is the ‘policy administration charge’. It is deducted from the fund value either as a percentage, a fixed sum every month, often based on the sum assured.
Irrespective of how the charges come in, the post-charges returns from most ULIP’s is below that from the ELSS funds for lower amounts. Lower front-end costs often come with higher mortality rates and policy administration charges, and so on.
After looking at the above comparison, although an ELSS looks more favorable, an individual should keep in mind that these tax-saving funds invest 100 per cent of their corpus in equities. Balanced or debt schemes are not available for availing the tax benefits under Section 80C.
Therefore, individuals who do not have the risk appetite for equities could opt for a balanced ULIP, as tax-saving funds would be too risky for them. Also, a
ULIP offers an individual the choice to 'protect' his portfolio if need be by way of a restructure. He can shift his money from high-risk equities to debt or go for a balanced portfolio, unlike investments in tax saving funds where he either could holds on to your investments or sell them. Besides, many
insurance companies have introduced ULIPs with a capital guarantee. This product protects individuals from a potential market slide. In case of a market slide, the insurance company purports to at least return the premia paid by the individual.
This is unlike investments in a mutual fund scheme where you are partner to both profits as well as losses incurred by the scheme.
Hence we can conclude by saying, individuals who have the stomach for taking risk can separate their investment and
insurance needs. They can consider the option of buying a term plan separately and investing in tax-saving funds.
Whilst investors who do not have an appetite for risks, but who would still like to add a dash of equity to their portfolio, could look at investing in a balanced ULIP.
