Earlier, if one wanted to buy life insurance, they would have the sole option of the traditional life insurance policy only. Now, one has a variety of options to choose from when it comes to life protection. Unit Linked Insurance Plan, or a ULIP, is one such option that has been attracting investors and insurance-seekers alike with the benefit it offers: that of achieving life protection and gaining investment-based returns at the same time. What is even better is that the ULIP policyholder-cum-investor gets the option to switch their investment from debt to equity and vice versa. Let’s take a deeper look.
How do ULIPs work?
When you pay a premium for your ULIP plan, the payment is used by the insurance companies for two purposes. One section of the premium is aimed to build the life cover you want for your loved ones, and the other is invested in market-linked financial instruments. In most cases, if the policyholder passes away, the beneficiaries receive the higher amount between the sum assured or the fund value of the ULIP. The workings of ULIP policies differ from insurer to insurer.
What is fund switching in ULIP plans?
The investment portion of your premium can be directed to equity funds or debt funds, depending on the risk appetite of the policyholder. Those looking for a mix of both can also opt for a combination of both. However, it must be said that the risk appetite of individuals shifts as per the changes in their life. Thus, the kind of asset class they want to invest in might also change. Unlike other investment products, ULIPs allow one to make a switch from equity to debt and vice versa with ease and convenience. The process of doing so is referred to as fund switching.
What to consider before switching funds
Are you considering moving your funds from debt to equity? Or, from equity to debt? Ensure to consider the following factors before you do so.
The performance of the market
Equity funds are dependent on market performance. If the market is in a slump, the returns on the funds, too, will perform negatively. If the market is on a high, the returns will soar as well. So, do take a look at the market performance before opting for fund switching in ULIP plans.
Inflation and rates of interest
Just as the market affects equity funds, inflation and interest rates affect debt funds. As the rates of interest fall, the value of a debt instrument increases. This means better returns on your investment in debt funds.
The life stage you are at and the consequent financial responsibilities
The amount of risk you are willing to undertake with your investment changes as you undergo different stages in your life. For instance, individuals in their early to mid-20s are more likely to have a stronger digestibility for risk. They have lesser financial responsibilities and are willing to bear risks in the present to create a more stable future for themselves and their family. On the other hand, when one is 40 years old, they are looking for more stability. They have a family to look after. Financial responsibilities such as children’s current education, their higher studies, and so on loom high. At this stage, one may want to devote 70-80% of their funds to debt funds in their ULIP.
Charges associated with fund switching
Some insurers might charge you a small fee when you switch funds. They may offer a limited number of fund switches a year, after which you may be charged. However, there are some companies that allow as many free switches a year as the policyholder wants.
Does fund switching incur taxation?
No, there is no taxation on ULIP fund switching. Instead, one can enjoy a host of ULIP tax benefits with their policy. You can claim deductions up to Rs 1.5 lakhs against your ULIP premium. Furthermore, the various pay-outs, such as the death benefit, the surrender value amount, and the maturity proceeds are exempted from taxation.
However, note that the maturity proceeds can be taxed if the premiums of ULIPs bought after February 1, 2020, amount to more than Rs 2.5 lakhs. The other ULIP tax benefits, too, are subject to amendments in tax laws.
