The tax benefit has changed in favour of unit-linked insurance plans (ULIPs) offered by life insurance firms following the new budget statement regarding the taxation of long-term capital gains (LTCG) from equity and equity mutual funds. This offers added ULIP benefits.
Here are five typical gimmicks used by some life insurance brokers and other middlemen, such as banks and other corporate agents, to entice you into investing in them, along with what they mean.
Knowing these will enable you to make an educated investment decision since the buyer’s reliance on the middleman frequently leads to the erroneous acquisition of financial instruments like ULIPs. You can utilise a ULIP Calculator to assess future returns and the value of a ULIP investment.
1. Change To A New And Improved Ulip
What they say: The fund in your current Ulip has a high net asset value (NAV) and little possibility of increasing in value in the future. A ULIP with a new fund choice and a lower NAV has been introduced by the insurer. It also has new features, thus, switching to the new ULIP plan is preferable.
What that means: The uninformed buyer will be required to fill out two new forms: one which goes for surrender (where the money goes directly into the bank) and the other one for a new application together with the check. There is no option for switching from one ULIP to another. If the surrender form is ignored, you will eventually have two policies and two premiums. Even if the current policy is cancelled, there are no ULIP benefits to purchasing a new ULIP and paying the entry cost once more, which could be between 10% and 12% of the initial premium.
2. A ULIP Akin To A Bank FD
What they say: Some distributors compare ULIPs to bank Fixed Deposits (FDs) as a sales gimmick. The primary targets, in this case, are bank customers. The agent will persuade the buyer that a ULIP functions similarly to a bank FD and that it is superior to an FD because it includes insurance. The illustrative advantage when pitching the ULIP is set at 4% and 8%, which is the same as what an FD makes.
What that means: Market-linked products called ULIPs mix insurance and investment. In contrast to bank FDs, such bundling is expensive and does not offer return guarantees. A bank FD is a debt instrument designed for a shorter goal with capital preservation as the primary purpose, whereas a ULIP is more of an equity product. Decide what you need, then invest in either of them.
3. A 5-Year Tax-Saving Product Is Called ULIP
What they say: ‘You have to invest for only five years’, is a popular sales gimmick intended to entice buyers who are merely trying to lock in funds for a little period and save taxes.
What that means: Although ULIPs have a five-year lock-in period, this does not obligate users to leave during that time. Because ULIPs’ costs are front-loaded, and the majority of the fees are assessed in the first five years, leaving after the lock-in could not be financially advantageous.
Those opting for the new Tax Regime will not get the benefit on these instruments, but they could with the old regime.
4. ULIPs Will Double Your Money
What they say: If you invest in a ULIP plan, your money will double in value within five years. Again, this is a typical sales gimmick, especially at a time when the stock market is at an all-time high. Prospective purchasers are provided historical returns to entice them.
What that means: Returns in a ULIP depend on the fundamental performance of each asset class or the fund choice, and investors can choose to invest in equities, debt, or both. The fund value is not assured, nor is there any assurance that the fund will produce a particular return.
5. A One-Time Premium Only
What they say: ‘Pay only in time and reap the benefits forever’, is another sales gimmick, particularly when used to entice those who wish who want to make long-term investments to reduce their tax burden.
What that means: There’s nothing wrong with this unless you purchase it intentionally and associate it with a long-term objective. Despite being assured that you only need to pay the premium once, you may really be sold a regular premium insurance that demands premium payments every year for, say, 10 or 20 years.
The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.