Saving tax through Ulips will lead to mixing of insurance with investment.

Investor: I am told that unit linked insurance plans (Ulips) can also be used for tax planning. How does one take advantage of that?

Advisor: It is true that Ulips are eligible for tax saving under section 80C. Nowadays, they are being aggressively promoted by all the insurance companies as a tax saving as well as investment instrument.

Investor: How are Ulips different from all the other insurance policies?

Advisor: Ulips, despite being an insurance product, gives you returns at the end of the plan period. It also provides some liquidity, as you can withdraw the premiums (after the cutting of costs) after a time period of three years. The returns, after the completion of the plan, are 100 per cent tax free.

In case of traditional plans, premiums are payable for a fixed term of 25 or 35 years. In case the premium payment is skipped even for one year, the policy can lapse. In Ulips, however, there is flexibility to stop paying premiums after three years and the life cover will still continue.

Also, traditional plans do not increase the sum assured, once you have bought a particular policy. To increase the sum assured, you will have to buy another policy. But Ulips allow you to increase the insurance cover anytime.

Investor: What about returns from Ulips?

Advisor: Under Irda guidelines, traditional plans have to invest at least 85 per cent in debt instruments (largely government securities) and a maximum of 15 per cent in equities, which results in return of around 6 per cent.

In case of Ulips, the returns can be increased by aggressive investment in equity plans. In fact there are a number of options for different kinds of investors.

For instance, there are options where 100 per cent of the corpus can be invested in equities, thereby increasing the returns. Also, for the risk-averse, there are options of low equity exposure and high debt. This reduces returns but gives stability.

Investor: How liquid are these products?

Advisor: Traditional insurance plans are not very liquid. Only the Money Back plans offer fixed survival benefits at the end of every fourth or fifth years. In Ulips, after five years, periodic withdrawals are allowed, subject to a minimum balance.

Investor: Any other unique features of ULIP

Advisor: Yes, there are some unique features. These include:

• Potential for superior returns by switching between equity & debt
• More liquid than some other products
• Flexible Insurance Cover
• 100 per cent tax-free returns on withdrawals and maturity
• 100 per cent tax deduction up to Rs 1 lakh under section 80C.

Investor: Would you recommend Ulips as an efficient method of tax saving?

Advisor: Frankly, No. My reasons for avoiding Ulips are as under:

• Ulips, being insurance products, take away a major part of your contribution towards agents' commissions, insurers' expenses, fund management fees etc, leaving a small part for actual investment, on which, the insurer generates returns for its investors. Therefore, the investible amount goes down substantially in the initial years.
• There are much better instruments such as PPF, ELSS, among others, where the returns are much higher.
• For life cover, there are alternatives products such as term policies that are much cheaper.
• For cover for medical expenses, there are mediclaim insurance policies for which  there is a separate tax deduction up to Rs 15,000 under section 80D on the premium paid.

Investor: In your view, should I use Ulips for my 80C deduction?

Advisor: No.

The writer is a chartered accountant.