Source: The Economic Times
Classical Theorists have always argued that mutual funds (MFs) and insurance term plans together make an excellent combination. This, they claim, is far superior to the unit-linked insurance plans (Ulips) that are available in the market today, over the long term.
However, this may not give you the correct picture. To illustrate this point, you need to experience the flexibility offered by Ulips. The various categories under Ulips range from short pay to regular pay products. In each category, Ulips can beat MFs plus term plans over varying time periods, mainly on account of two basic differentiators:
Fund Management Charge: This is a recurring charge that is much lower in Ulips than in MFs. This charge is a fixed percentage chargeable over the entire fund value on an annualised basis. This charge eats into the MF as it is higher by 1-1 .25% compared to Ulips.
Reducing Mortality Charge: The mortality charges are lower in the case of Ulips, since these charges are recovered on the sum at risk, versus a fixed amount paid in case of a term plan. As the fund value continues to grow in Ulips, the sum at risk reduces and when fund value is equal to the sum assured, no mortality charge is applicable. However, there are other important differentiators as well:
Switching Across Funds: The customer has the option to switch across funds free of charge. This enables the customer to change his/her risk profile based on changing risktaking ability over his/her lifetime.
No Redemption Pressure: The fund manager is not under redemption pressure in a bearish market, leading to higher average annualised returns in the long term in case of Ulips. This works against a retail customer in case of MFs, since redemption pressure forces the fund manager to sell, even though s/he may want to hold back the investments.
Top-Up Options: Ulips offer the advantage of accessing market-related returns on additional investments too, using the option of top-ups , wherein the premium allocation charge is much lower compared to mutual funds.
Allocation Across Funds: The customer also has the option to choose an allocation ratio at the time of paying his/her premium, which enables him/her to customise the allocation ratio based on individual needs. This ratio can also be changed free of charge, depending on the Ulip chosen.
Partial Withdrawals: Ulips offer the advantage of leveraging the plan to meet life cycle needs without surrendering the plan. This has been made possible due to the facility of partial withdrawals that can be made from the fund value any time after three policy years. Hence, customers get the much-needed liquidity in times of need.
Power Of Assignment: In case of Ulips, customers enjoy the additional advantage of leveraging the power of assignment, which even supersedes will. This is an exclusive benefit, which is not applicable in the case of MF investments, thereby giving customers the option to use Ulips as an excellent wealth management and succession planning tool.
Tax Advantage At All Three Stages: Customers get tax benefits at all three stages under the Income Tax Act 1961 as follows: (a) Contribution under Section 80C capped at Rs 1,00,000 (b) Partial withdrawals are tax-free under Section 10 (10D) (c) Maturity proceeds are tax-free under Section 10 (10D)
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