In the vast ocean of insurance products, one can browse through and of course be spoilt for choice when it comes to buying insurance. It is a well-known fact that anybody who is desirous of buying a policy should take into account not just his present level of income but also the future perils that may befall him or her. To that end, there are in numerous varieties of policies ranging from a simple endowment policy to something known as ULIP. In essence, ULIP is an abbreviation for Unit Linked Insurance Policy.

To the uninitiated, this may seem something out of a Latin textbook. Of course, we are dealing with an insurance policy here too. However, this kind of insurance policy is a plan that is linked to the shares and securities market. In effect, a ULIP policy invests the money received from the insured, known as premiums paid in the securities market. Thus, if and when the insured person stays invested in the policy for a longer term, he or she can reap better returns from the same. This is because as and when the person who has taken the policy pays their premium, the company which has issued the policy to them invests a large part of the premium in the securities market.

Now comes the question of whether this kind of policy is safe or whether the person who buys such a policy can stand to benefit in the long term or not. It is a well-known fact that both the insurance as well as the securities market is a game of the long run. Hence, if a person is aiming for high ULIP returns within the first year or even a couple of years, he would be better advised to invest it elsewhere. This is because the units bought now are seen to yield returns only in the long term. This investment strategy is like the marathon. Just like in the marathon, where you start slow and build a regular pace and gradually after maintaining the pace for a considerable amount of time, would accelerate in the final strides of the race. Similarly, in the ULIP strategy towards a better economic future, it does work wonders only if you are vested in the plan for a minimum of five years.

Now that you have been convinced that you are in this for a long haul, there are some very important implications that you should know and acquaint yourself with.

Tax benefit on Investment: Premiums paid for a ULIP policy is deemed to be eligible for tax deduction under section 80C. However, there are certain caveats to this. If you have purchased the ULIP before April 1, 2012 This deduction availed under section 80C can only be availed if the premium that is paid is less than a fifth of the amount for which the policy is purchased, which is also known as the sum assured.

However, if the premium for the ULIP policy that has been paid is more than 20% of the sum assured, then the deduction in the tax is allowed on the amount that equals 20% of the sum assured.

Deduction can be claimed amount on which amount? – The income tax act has specified that ‘any amount paid to keep in force’ a policy can be claimed as a deduction. So people are well advised by their financial advisors to pick the amount in its entirety that may have been paid by you for deduction under the Section 80C. You will not be wrong if you also include the service tax that is paid as well as any other charges that may have been collected by the insurer.

Another point in contention when it comes to claiming tax deductions is that the policy should be kept in force for a minimum of five years from the date that it has been purchased.  If in case, you were not able to pay the premiums after a couple of years or anytime within the five years as stipulated, then you may have to repay the increased amount for which you have been exempted in the period trailing when you did not pay the premium. This is because the taxman will want that amount of ULIP returns clubbed in your income for the next financial year.

Tax benefit on Maturity of ULIP

If the premium that has been paid for the policy amounts to less than one-tenth of the sum assured during the term that the policy is in force, the maturity amount received is taken as exempt from tax. (For policies that have been purchased before April 1, 2012, the premium has to be less than one fifth of the sum assured). This exemption is allowed under section 10(10D) of the Income Tax Act. You will be placed better when you report this ULIP returns as income that is exempt in your income tax returns.

However, if the premium amounts are greater than the percentages prescribed above, the entire sum of money received at the time of maturity needs to be added as income under Income from other sources in the income tax returns. This in turn shall be taxable, as is common knowledge, at the slab rate applicable to you.

The bottom line is to not only pay your premiums on time but also to be aware of the implications and the advantages that await you when you invest wisely in a ULIP after weighing the pros and cons of the plan which you may be interested in.