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How are Unit-Linked Insurance Plans (ULIPs) better than Bank Fixed Deposits?

Source : SIFY
Last Updated: Tue, Aug 14, 2012 12:12 hrs
Kyle Stanley

What is a Bank Fixed Deposit?

In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest is determined by the bank from time to time depending on the period of investment. There is great flexibility in maturity period and it ranges from 15days to 5 years. The fixed deposit can also be liquidated before the tenure is over but with a loss of interest.

Bank Fixed Deposit is a guaranteed return investment tool where you actually lend the money to the bank and they pay you an interest for the loan amount. Thus the basic features of an FD are:

  • Guaranteed returns product. The fixed deposit rates are fixed by the bank from time to time depending on the treasury requirements of the bank.
  • Safe investment as it is with a bank which is bound by regulatory authorities. It is almost a 100% safe investment tool.
  • One can get loans up to 75- 90% of the deposit amount from banks against fixed deposit receipts. Though the interest charged will be slightly more than the interest earned by the deposit.myinsuranceclub.com
Tax Implications of a Fixed Deposit:
  • The amount invested in fixed deposits with a maturity period of 5 years in a Scheduled bank is eligible for tax deduction under section 80C. However, the interest earned on the deposit is taxable.
  • For all types of Fixed Deposit, tax will be deducted at the source, if the interest income on a fixed deposit exceeds Rs.10000 per annum.

What is a ULIP?

ULIP is an abbreviation for Unit Linked Insurance Policy.  A ULIP is a life insurance policy which provides a combination of risk cover and investment.  The dynamics of the capital market have a direct bearing on the performance of the ULIPs. In ULIPs, the risk of investment is borne by the policyholder.

Are Investment Returns Guaranteed in a ULIP?

Investment returns from ULIP may not be "guaranteed." In unit linked policies, the investment risk in investment portfolio is borne by the policy holder. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.

Tax Implications of ULIPs:

  • The premium amount till Rs 1,00,000 per annum is tax free under section 80(C) of the Income Tax Act of India provided
  • The maturity amount is also tax free under section 10(10)D

Provided all the terms and conditions are fulfilled:

    • The amount needs to be invested for at least 5 years
    • And the minimum ratio between premium and sum assured need to be 1:10 in all the years.

Both the above 2 conditions have been made compulsory by the IRDA Guidelines

How are ULIPs better than Fixed Deposits?

  1. Fixed Deposits do not provide life cover which ULIPs do. According to the IRDA Guidelines effective from 1st September 2010, ULIPs must have Life Cover at least 10 times the annualized premium.
  2. For additional investment in Fixed Deposits, a new Fixed Deposit account needs to be opened at the prevailing rate of interest of the bank. However, in ULIPs there is a scope for additional investment in the same policy by top up premium.
  3. Fixed Deposit does not offer a choice of investment across different asset classes which are available in ULIPs. Thus investment in ULIPs can be done according to the risk appetite of the individual.
  4. There is no guarantee that that Fixed Deposit interest rates will necessarily rise or remain constant over a period of time. It will remain constant for the mentioned period but it may vary if a new investment needs to be made at a different time.
  5. For long term, Fixed Deposits needs to be re-invested once the tenure is over unless the maturity instructions have been provided for it to be done automatically.
  6. Even if the market performs well, there is only a moderate return in a Fixed Deposit according to the rate of interest that has been pre-determined at the time of inception. However in ULIPs, the market returns can be reaped by the individual.
  7. The maturity amount is taxable in Fixed Deposits but the same is tax-free in ULIPs under section 10(10) D.

Precisely, the difference between ULIPs and Bank Fixed Deposits can be summed as:

 

ULIP

Bank Fixed Deposits

Nature of Returns

Market Related

Fixed

Expected rate of returns

High

Moderate

Tax Benefits

  • Premium Tax Free till Rs.1,00,000 p.a. U/S 80C
  • Maturity amount tax free U/S 10(10)D
  • Premium Tax Free till Rs.1,00,000 p.a. U/S 80C if FD>= 5 years and not otherwise
  • Maturity interest amount is taxable.

Flexibility

  • Partial Withdrawal: Option to withdraw money partially
  • Switching: Change asset class according to market performance expectation and reap maximum benefits
  • Loan: Can avail loan upto 40% of the Fund value
  • Top Up: Pay additional premium in the same policy without having to purchase another investment tool
  • Partial Withdrawal: Not allowed in Bank Fixed Deposits
  • Switching: Not allowed in Bank Fixed Deposits
  • Loan: can avail loan upto 75-90% of the maturity amount
  • Top Up: Not allowed in Bank Fixed Deposits

 

Risk Level

High

Low

Tenure of investment

Long Term

Short Term

What kind of investor should buy this?

Risk Lover

Risk Averter

Choice of Investment

Can choose from the available funds

Fixed.

Life Cover

Available of minimum 10 times the premium amount

Not available in Bank Fixed Deposits

There are many ways in which Fixed Deposits are considered better than ULIPs and most importantly it is a safe investment where the returns are guaranteed, but ULIPs are also a very good investment tool. However it needs to be purchased not because someone sells it to you, but because you have gone through the terms and conditions of the same and have accepted it after analyzing your and your family's financial requirements!

Deepak

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com

You may write to the author at Deepak@myinsuranceclub.com

 


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