Mutual Funds vs ULIPS (considering tax free returns on maturity)

[Sudhaker]

Hi All,

I know we all hated ULIPS in the past for their exorbitant mortality and administration charges but with MF investing becoming easy as click of a button they soon lost their place as investment option.
Today I want to ask if investing in ULIPS for a long term give better returns than MF considering the returns from ULIP are tax free if below two conditions are met as per latest regulations.

First condition is an individual shall not be investing more than 2.5 Lakh in a year​

Second the sum assured shall not exceed 10 times the premium paid.​

Given above two conditions are met the returns from ULIPS are tax free under section 10(10D) - Correct me this is wrong...

I know the charges of ULIP are bit higher than MF expense ratio, however I wanted to understand the below scenario but unable to come to an exact conclusion if there are any other factors that could impact the returns.

Lets say if person A is investing in ULIP (equity linked) of 2 Lakh year for 20 years and similarly person B is investing 2 Lakh a year in MF of the same underlying equity schemes that the ULIP is investing.
Now after 20 Years the returns of ULIP could be less that of MF as the charges levied every year on ULIP eat up from the returns, but MF would also attract 10% LTCG on any profit exceeding 1 Lakh at the time of maturity.
If both Person A and Person B redeeming their investments after 20 Years would ULIP returns be more than MF (post LTCG deduction in MF)?

Note: ULIP will pay Sum Assured (20 Lakh in the above case along with returns) in the term period if something happens to the customer but MF may only give back the investment along with returns accumulated so far to Nominee.
I don't want to compare Term insurance to ULIP as an insurance product but solely want to check if ULIP has advantage over MF as an "investment + insurance + Tax free" returns in an equity linked scheme if that even makes sense.

 

[17ysaurabh]

Points to consider in ULIP:
1. Life Cover: We can get a life cover of much higher value with such a small amount in Term insurance that it makes no sense to choose ULIP for this reason.
2. Compulsory premium: We must pay a premium quarterly, monthly, half-yearly or annually in ULIPs. We cannot pause it.
Suppose, for any reason, we stop paying the premium, and the ULIP gets converted into a discontinued fund. We have to pay penalty charges plus life cover benefits go away.
3. Lock-in period: ULIPs have a 5-year lock-in period. After that, you can only withdraw 10-20% of the premium amount till the investment period you have selected.
4. Tax benefit: ULIPs give tax-free returns only if the premium amount paid is less than Rs. 2.5 lakhs per year. On the other hand, in Mutual funds, you can save taxes up to Rs. 1 lakhs using tax harvesting for LTCG.

ULIPs might give you a slightly higher return than Mutual funds because of their tax benefits.
But are you ready to lock-in your amount for 5 years or more?
Can you pay the premium timely for the course of time?

PS: I prefer mutual funds because it feels like an investment that I do rather than a bill that must be paid as in ULIPs.

 

[Sudhaker]

Hi @17ysaurabh Thanks for the reply, I agree with almost all points you mentioned.

Let me respond to you point by point.
1. I have seen most of the finfluencers (on Social Media) compare the entire premium of ULIP to entire premium of Term and say it cheaper to buy term insurance, but in actual we should just compare the mortality charges for the Sum Assured in ULIP to premium of similar coverage in Term. If you did consider that and still ULIP charges are higher than Term then point noted, however as I mentioned my intention of this post is not to compare it as Term insurance but an investment option considering Insurance as a bonus rather than core of the investment.
2. Same is the case with Term insurance as well, if we stop paying the premium the coverage sieges to exists and the premium paid so far is also gone.
3. Agreed, again as I mentioned I am looking for a 10-20 year term so lock in period of 5 years is not a problem for me.
4. This is where I am more interested in. I already have few SIPs in MFs so the LTCG limit can be easy utilised by churning them every year and reinvesting the MF withdrawal amount, so I am looking for something that is over and above 1 Lakh LTCG limit.

To answer your final questions, Yes I am OK for 5-year lock-in and yes I can pay regular premium on time.

To be honest I would also recommend anyone to keep investment and insurance as separate, but that is already covered a lot on the internet.

In my case I have exhausted all avenues of tax saving and maxed out the investment options (PF, MF, NPS and have some emergency fund parked in sweep-in FD account), already have term and medical insurance, now looking for any other avenues that are of potential interest and this thought came across and wanted to run by in this forum.

 

[17ysaurabh]

Hi @17ysaurabh Thanks for the reply, I agree with almost all points you mentioned.

Let me respond to you point by point.
1. I have seen most of the finfluencers (on Social Media) compare the entire premium of ULIP to entire premium of Term and say it cheaper to buy term insurance, but in actual we should just compare the mortality charges for the Sum Assured in ULIP to premium of similar coverage in Term. If you did consider that and still ULIP charges are higher than Term then point noted, however as I mentioned my intention of this post is not to compare it as Term insurance but an investment option considering Insurance as a bonus rather than core of the investment.
2. Same is the case with Term insurance as well, if we stop paying the premium the coverage sieges to exists and the premium paid so far is also gone.
3. Agreed, again as I mentioned I am looking for a 10-20 year term so lock in period of 5 years is not a problem for me.
4. This is where I am more interested in. I already have few SIPs in MFs so the LTCG limit can be easy utilised by churning them every year and reinvesting the MF withdrawal amount, so I am looking for something that is over and above 1 Lakh LTCG limit.

To answer your final questions, Yes I am OK for 5-year lock-in and yes I can pay regular premium on time.

To be honest I would also recommend anyone to keep investment and insurance as separate, but that is already covered a lot on the internet.

In my case I have exhausted all avenues of tax saving and maxed out the investment options (PF, MF, NPS and have some emergency fund parked in sweep-in FD account), already have term and medical insurance, now looking for any other avenues that are of potential interest and this thought came across and wanted to run by in this forum.

Yeah, since you have maxed out all the other investment and tax-saving options.
ULIPs sound like a good option.

 

[Sudhaker]

Any suggestions on good ULIPS which are market linked with better returns?

 

[ahesartamboli]

ELSS

 

[zacobite]

Hi All,

I know we all hated ULIPS in the past for their exorbitant mortality and administration charges but with MF investing becoming easy as click of a button they soon lost their place as investment option.
Today I want to ask if investing in ULIPS for a long term give better returns than MF considering the returns from ULIP are tax free if below two conditions are met as per latest regulations.

First condition is an individual shall not be investing more than 2.5 Lakh in a year​

Second the sum assured shall not exceed 10 times the premium paid.​

Given above two conditions are met the returns from ULIPS are tax free under section 10(10D) - Correct me this is wrong...

I know the charges of ULIP are bit higher than MF expense ratio, however I wanted to understand the below scenario but unable to come to an exact conclusion if there are any other factors that could impact the returns.

Lets say if person A is investing in ULIP (equity linked) of 2 Lakh year for 20 years and similarly person B is investing 2 Lakh a year in MF of the same underlying equity schemes that the ULIP is investing.
Now after 20 Years the returns of ULIP could be less that of MF as the charges levied every year on ULIP eat up from the returns, but MF would also attract 10% LTCG on any profit exceeding 1 Lakh at the time of maturity.
If both Person A and Person B redeeming their investments after 20 Years would ULIP returns be more than MF (post LTCG deduction in MF)?

Note: ULIP will pay Sum Assured (20 Lakh in the above case along with returns) in the term period if something happens to the customer but MF may only give back the investment along with returns accumulated so far to Nominee.
I don't want to compare Term insurance to ULIP as an insurance product but solely want to check if ULIP has advantage over MF as an "investment + insurance + Tax free" returns in an equity linked scheme if that even makes sense.

some minor edit.. taxation is based on when ulip was taken.. attached is a screen..so the two conditions are both not applicable.. it varies basis year of policy start and on total ULIPs together - not per policy

 

[zacobite]

Hi All,

I know we all hated ULIPS in the past for their exorbitant mortality and administration charges but with MF investing becoming easy as click of a button they soon lost their place as investment option.
Today I want to ask if investing in ULIPS for a long term give better returns than MF considering the returns from ULIP are tax free if below two conditions are met as per latest regulations.

First condition is an individual shall not be investing more than 2.5 Lakh in a year​

Second the sum assured shall not exceed 10 times the premium paid.​

Given above two conditions are met the returns from ULIPS are tax free under section 10(10D) - Correct me this is wrong...

I know the charges of ULIP are bit higher than MF expense ratio, however I wanted to understand the below scenario but unable to come to an exact conclusion if there are any other factors that could impact the returns.

Lets say if person A is investing in ULIP (equity linked) of 2 Lakh year for 20 years and similarly person B is investing 2 Lakh a year in MF of the same underlying equity schemes that the ULIP is investing.
Now after 20 Years the returns of ULIP could be less that of MF as the charges levied every year on ULIP eat up from the returns, but MF would also attract 10% LTCG on any profit exceeding 1 Lakh at the time of maturity.
If both Person A and Person B redeeming their investments after 20 Years would ULIP returns be more than MF (post LTCG deduction in MF)?

Note: ULIP will pay Sum Assured (20 Lakh in the above case along with returns) in the term period if something happens to the customer but MF may only give back the investment along with returns accumulated so far to Nominee.
I don't want to compare Term insurance to ULIP as an insurance product but solely want to check if ULIP has advantage over MF as an "investment + insurance + Tax free" returns in an equity linked scheme if that even makes sense.

ULIP has 4 clear advantages - it also gives you life cover / its cost structure is fixed for the full term / tax friendly and most importantly gives to flexibility to chg funds along the term.. charges have also been reduced significantly.. return rates may be marginally better in long term.. the trend of withdrawal or closure after 3-5 yrs is not recommended.. ulip has to be 15-20 yrs else stay with mf... ulip can be part of your overall plan.. but MFs are recommended as primary... there are many more angles so have to evaluated basis personal preference and situation