What should you do with the ULIP Funds that you Have

Written by : Knowledge Centre Team

2022-02-08

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Investment can be divided into two categories, long-term and short-term. Both these investments have their own features and can help you achieve different goals. But if your goal is to create a huge corpus, then long-term investments should be the go-to option for you.

Long-term investments are the options that you hold for at least more than three years. On average, these investments are to be held for a period of 5-10 years. These investments help you to make the most out of the power of compounding.

Do ULIPs Get the Benefit of Compounding?

Yes, ULIPs get compounding benefits so far as you don’t withdraw the money from it. Since the ULIP plan has a lock-in period of five years. So for the first five years, your investments will certainly compound. After the lock-in period if you can continue investing or at least stay invested the money will continue to compound.

Benefit of Compounding

The longer you hold your investment the higher it can grow, thanks to compounding. Here is a short example that will help you how the effect of compounding increases with the investment term.

Raj and Rahul both decided to invest Rs 1 lakh a year. Rahul withdrew his money after 10 years. While Raj kept his investment untouched and allowed the interest to be reinvested for 5 more years.

Basis	Rahul	Raj
Principal Invested	Rs 1 lakh	Rs 1 lakh
Time Invested	10 years	10 years
Period	10 years	15 years
Amount invested/ROI	Rs 10 lakh/ 8% P. A	Rs 10 lakh/ 8% P. A
Total (after 10 years)	Rs 15.65 lakhs	Rs 23 lakhs

You see, by keeping the money for extra 5 years, help Raj gain approx. 7.5 lakh Rs. This is the power of compounding.

Before deciding what to do with your ULIP plan, you need to go back in time just a little bit and find the purpose for which you invested in ULIP.

Most of the investments are made to achieve some goal. Investments are made so that you can help yourself as your family to achieve their dreams and goals.

Unit linked insurance plan is one of the best investments for you if you want to achieve a long-term goal. If you stay long enough, it can help you create a good corpus that is sufficient to achieve various milestones. You should thus be able to link your investments to your goals.

These can be the following

i. Buying a Car
ii. Buying a new house
iii. Taking care of child’s education
iv. Child’s marriage
v. Creating a retirement corpus

If your ULIP investment has made enough, then you can use the money to achieve these milestones listed above or can move further with the policy to achieve another goal.

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What are the Benefits of Buying a ULIP other than Returns?

Another big reason that you should continue holding your ULIP plan is that there are certain benefits that are term-specific. That is, these will be available to you only when you stay invested for the long term.

1. Loyalty Additions

This is the bonus you receive for staying invested for long. Think of it as you being rewarded by the insurance company for continuing with their plan.

a) Extra units are added to your fund after every 5th year till the time of your premium payment duration.
b) Loyalty additions are calculated on the average value of the fund for the past 60 months.
c) A percentage of this average fund value is added to your fund as a loyalty bonus.
d) Loyalty addition is available between 0.25-0.5% of the average fund value.

2. Wealth Boosters

This helps increase your fund value by adding additional units without any charge.

a) These are first added 10 years after the policy has started
b) After the 10th year, these are added every 5th year
c) The range of wealth booster varies from 0.5%-5.5%.
d) The wealth booster is based on the average of your fund value for the last 60 months.

Other Reasons to Continue with your Old ULIPs

Not only bonuses, but other reasons also suggest that you should continue to hold your ULIP plans. These are:

1. Lower Mortality Charge

The mortality charge is the amount that you have to pay for your insurance coverage. The mortality charges are deducted from your fund’s value.

These increase with age. So, if you do not continue with your existing ULIP and buy a new plan, you will incur a higher mortality charge.

2. Higher Fund Value

In ULIPs, a fund is created. As you invest in different assets, your fund’s value increases. The premiums that you pay in ULIPs are invested in different funds.

These funds are linked with the market and can grow with time. The longer you hold the more your fund value can increase as risks also get minimized in the long run.

On the other hand, if you look for another ULIP or any other investment, then your fund value will not be that much.

3. Power of Compounding

The effect that the power of compounding has on your investment gets stronger with each passing year. Even regular investments of small amounts can be created into a huge fund in the long run.

In compounding, the interest your investment earns is reinvested. The next time, you will earn interest on the existing interest as well.

4. Tax-Exemption

If you don’t want to continue with your ULIP, you will have to find another source to invest your money in. Finding the right source can take some time, as proper research should be done and many procedures are involved.

Also, it becomes harder to invest the large funds from old ULIP in a tax-exempt investment.

Tax-Exemption in Old ULIPs vs New ULIPs

After 1st February 2021, there have been several amendments made to ULIP through the finance bill. This has changed the taxation of ULIPs.

Here’s what changed

Taxes on Premium

a) ULIPs you had bought before 1st Feb 2021 will continue to have the same benefits as before
b) The total premium for all the ULIPs you have bought after 1st Feb 2021 will be exempt from tax only up to Rs 2.5 lakhs,
c) The ULIPs which fall beyond this investment ceiling will have taxable maturity values and withdrawals

Tax Treatment Above Rs 2.5 Lakh

a) If your ULIP funds constitute more than 65% of equity, then it will be taxed as an Equity Mutual fund
b) In the case of indirect investment in equity, at least 90% of funds should be in equity
c) If these conditions are not met then your ULIP will be charged as debt Investment (Section 112)

The death benefit has remained unaffected in this budget. Thus, the amount that your family members will receive after your death will remain exempt from tax. Thus, the exemption u/s 10(10)D remains valid.

Thus, with all the points stated in the article, it becomes clear that if you currently possess a unit-linked insurance plan, then you should hold it further.

Staying invested in your ULIP plan can not only increase your corpus and give you compounding benefits but will also prove good taxation-wise. ULIPs purchased before February 1st, 2021 will still have tax benefits.

Thus, investing in ULIP for the long term can be a beneficial investment that can help you achieve your goals and at the same time provide your family, with financial security.

Go Long-Term with Invest 4G

Invest 4G from Canara HSBC Life Insurance has a lot of advantages and one of the longest possible holding periods.

You can continue the plan till 100 years of age under the Century option and…

a) Pay a premium for a limited time:

In this plan, you need to pay premiums only till 60. The benefits will continue till 100.

b) Leave a legacy:

In this plan, you are covered till 100. Thus, if you live till 100, you are provided with a maturity benefit. You can leave this to your children and grandchildren and leave your legacy behind.

c) Tax-free partial withdrawal:

You do not have to worry about staying for the long term, you can even withdraw your money. ULIP has tax-free partial withdrawals.

Invest for Long-Term to Maximise Growth

Long-term investment offers better growth to your savings. ULIPs give you the opportunity to use this long investment period to its full potential. With ULIPs you can maximise your returns with equity funds and bonuses. Additionally, the investment can remain entirely tax-free.

So, the ULIPs tick all the checkboxes for the wealth maximising investment plan.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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