Tagged: ULIP

ATM :: Young earner? Five financial mistakes you may regret later

By Sanjiv Singhal | Jun 20, 2016, 07.00 AM IST | Economic Times

ATM

Interact with a lot of young earners on a daily basis. These are men and women in the first 5-6 years of their working lives, with dreams and hopes that require money to achieve. Some of them are already saving, while others are not, but all are full of questions and want to know how to do it better. It doesn’t matter what job they have and how much they earn; there are mistakes that run through all their stories. Here are some of the most common ones:

“I bought a life insurance policy to save tax.”
The good thing about this confession is that the person understands he made a mistake. For most, it starts at the end of the year when they needed to submit their investment proof to the HR. They scramble around to figure out how and blindly buy an insurance policy (after all, insurance is a good thing to have, no?). Almost every other tax-saving option is better than life insurance. Tax-saving (ELSS) funds are the best option for young earners.

“I wasn’t sure where to invest, so I didn’t.”
When you don’t set aside money regularly, it sits in your bank account and often gets spent. This hurts in two ways. One, it doesn’t create wealth for you, which investing early does. Second, it forms unsustainable spending habits. Start by setting aside 5-10% of your salary every month in a debt fund or in a recurring deposit if you don’t know enough about mutual funds.

“I bought stocks to double my money because my friend did.”
This is a mistake often made due to lack of understanding about how stock investment works and a false sense of knowledge. Greed and stories of exceptional returns also spur one on. The best way to resist this is to check with friends and colleagues about how many actually earned such fantastic returns and how many lost money. Stock investing requires deep knowledge and time. As a young professional, you are better off committing this time to your job.

“I change jobs every year to increase my salary.”
This is not an investing mistake, but one of not investing in yourself. Sticking with a job gives you the opportunity to develop your skills in a specific area. It also gives you the time to learn softer skills – of working with people and managing them. This leads to better career prospects and more wealth.

“I forgot about my education loan.”
A lot of young earners are starting their financial lives with an education loan taken for an MBA or MTech. As they mostly work away from home, they may not get the communication from the bank, or choose to ignore it. The interest mounts up and they are left with a bigger repayment amount. Focus on education loan repayment in a disciplined manner. When you are done with the with the repayment, direct this amount to long-term investments. Avoiding these common mistakes is easy once you know about them. Spending time learning about the principles of money and investing is a good investment to begin with.

(The author is Founder & Head, Product Strategy at Scripbox)

Source: http://goo.gl/O7HPqf

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ATM:: 9 smart ways to save tax

Babar Zaidi | TNN | Jan 11, 2016, 08.57 AM IST | Times of India

ATM

Do-it-yourself tax planning can be rewarding and challenging. Rewarding, because you can choose the tax-saving instrument that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters—returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.

While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!

ELSS FUNDS
ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency. The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.

If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund. Last year was not good for equities, and even top-rated ELSS funds lost money. However, the funds are miles ahead of PPF in 3- and 5-year returns.

The SIP route is the best way to contain the risk of investing in equity funds. However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.
SMART TIP
Opt for the direct plan. Returns are higher because charges are lower.

ULIP
The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What’s more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.
SMART TIP
Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.

NPS
The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of Rs 50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.

Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity. Right now, the income from annuities is taxed at the normal rate.
SMART TIP
Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.

PPF AND VPF
It’s been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.
SMART TIP
Allocate 25% of your pay hike to VPF. You won’t notice the deduction.

SUKANYA SAMRIDDHI SCHEME
This scheme for the girl child is a great way to save tax. It is open only to girls below 10. If you have a daughter that old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Accounts can be opened in any post office or designated branches of PSU banks with a minimum Rs 1,000. The maximum investment in a financial year is Rs 1.5 lakh and deposits can be made for 14 years. The account matures when the girl turns 21, though up to 50% of the corpus can be withdrawn after she turns 18.
SMART TIP
Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.

SENIOR CITIZENS’ SCHEME This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a Rs 15 lakh overall investment limit.
SMART TIP
If you want ot invest more than Rs 15 lakh, gift the amount to your spouse and invest in her name.

BANK FDS AND NSCs
Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the Rs 15 lakh limit in the Senior Citizens’ Saving Scheme.
SMART TIP
Invest in FDs and NSCs if you don’t have time to assess the other options and the deadline is near.

PENSION PLANS
Pension plans from insurance companies still have high charges which makes them poor investments. They also force the investor to put a larger portion (66%) of the corpus in an annuity. The prevailing annuity rates are not very attractive. Pension plans launched by mutual funds have lower charges, but are MFs disguised as pension plans. Moreover, they are debtoriented plans so they are not eligible for tax benefits that equity plans enjoy.
SMART TIP
Invest in plans from mutual funds. They offer greater flexibility than those from life insurers.

INSURANCE POLICIES
Traditional life insurance policies remain the worst way to save tax. Still, millions of taxpayers buy these policies every year, lured by the “triple benefits” of life insurance cover, longterm savings and tax benefits. Actually, these policies give very little cover. A premium of Rs 20,000 a year will get you a cover of roughly Rs 2 lakh. The returns are very poor, barely 6% if you opt for a 20-year plan. And the tax-free income is a sham. Going by the indexation rule, if the returns are below the inflation rate, the income should anyway be tax free. The problem is that once you sign up for these policies, they become millstones around your neck.
SMART TIP
If you can’t afford to pay the premium, turn your insurance plan into a paid-up policy.

Source: http://goo.gl/DWqo4K

ATM :: Choose the right tax-saving option

By Neha Pandey Deoras | Jan 12, 2015, 06.40AM IST |Times of India
ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here’s a look at these eight instruments.
ATM
The hike in the deduction limit under Section 80C means that a taxpayer can reduce his tax by up to Rs 15,000. But the higher limit may not be of much use if you don’t know which tax-saving option suits you best. ET Wealth graded the eight most common tax-saving investments on the basis of returns, safety, liquidity, flexibility, taxability of income and cost of investment. Here’s a look at these eight instruments.

ELSS FUNDS

Rating: 5

There are compelling reasons why ELSS funds should be part of the equity allocation in a taxpayer’s investment portfolio in 2015. Returns in past three years  27.34%. They may be low on safety but they score full points on all other parameters. The returns are high, the income is tax free, the investor is free to alter the time and amount of investment, the lock-in of 3 years is the shortest among all tax saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option and the cost is even lower if you go for the direct plans of these funds.

Smart tip: Invest in the dividend option which acts as a profit-booking mechanism and also gives you liquidity. Dividends are tax-free.

ULIPS

Rating: 4

For a lot of people, Ulip is still a four letter word. However, investors need to wake up to the new reality.

An ordinary Ulip is still a costly proposition for the buyer. But the online avatar of these marketlinked insurance plans is a low-cost option far removed from what was missold to investors a few years ago. The Click2Invest plan from HDFC Life, for instance, charges only 1.35% a year for fund management. Ulips can be used as a rebalancing tool by the savvy investor. He can switch from equity to debt and vice versa, without any tax implication. Buy a Ulip only if you can pay the premiums for the full term. Also, take a plan for at least 15 years. A short-term plan may not be able to recover the high charges levied in the initial years.

Smart tip: Don’t invest in the equity fund at one go.

Invest in a liquid fund and then shift small amounts to equity fund.

PPF

Rating: 4

Budget 2014 also hiked the annual investment limit in the PPF. Returns 8.7%. Risk averse investors can now sock away more in the ultra-safe for 2014-15 scheme. The PPF scores high on safety, taxability and costs, but returns are not so attractive and liquidity is not very high. The scheme will give 8.7% this year but don’t count on this in the following years. The interest rate on small savings schemes such as the PPF is linked to the government bond yield and is likely to come down in the coming years.

Smart tip: Open a PPF account in a bank that allows online access. It will reduce the effort.

SR CITIZENS’ SAVING SCHEME

Rating: 3

The Senior Citizens’ Saving Scheme (SCSS) is an ideal tax saving option for senior citizens above 60. Returns 9.2%. The money is safe and for 2014-15 returns and liquidity are reasonably good. However, the interest income received from the scheme is fully taxable.The interest rate is linked to the government bond yield. It is 1 percentage point higher than the 5-year government bond yield. Unlike in case of the PPF, the interest rate will remain unchanged till the investment matures.

Smart tip: Stagger your investments in the Senior Citizens’ Saving Scheme across 2-3 financial years to avail of the tax benefits.

NPS

Rating: 3

The New Pension Scheme (NPS) is yet to become a popular choice because of the complex procedures involved in opening an account. Returns 8-11% in past five years. But investors who managed to cross that chasm have found it rewarding. NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those of the Nifty, while corporate bond funds and gilt funds have given close to double-digit returns. But financial planners believe that the 50% cap on equity investments is too conservative. The other sore points is the lack of liquidity and taxability of the income. The annuity income will also be fully taxable.

Smart tip: Start a Tier II account to benefit from the low-cost structure of the NPS.

BANK FDS, NSCS

Rating: 2

Bank FDs and NSCs score high on safety, flexibility and costs but the tax treatment of income drags down the overall score. Returns 8.5-9.1% for 2015. The interest rates are a tad higher than what the PPF offers but the income is fully taxable at the slab rate applicable to the individual. They suit taxpayers in the 10% bracket (taxable income of less than `5 lakh a year). The big advantage is that these are widely available. Just walk into any bank branch and invest in its tax saving fixed deposit.

Smart tip: Build a ladder by investing every year.After the fourth year, just reinvest the maturity amounts in fresh deposits.

PENSION PLANS

Rating: 1

Pension plans from insurance companies remain costly investments that are best avoided. Returns in past three years 8-18%. Instead, it may be a better idea to go for retirement funds from mutual funds. They give the same tax benefits but don’t force the investor to annuitise the corpus on maturity. He is also free to remain invested beyond the age of 60. Till now, all the pension plans were debt-oriented balanced schemes.Last week, Reliance Mutual Fund launched its Reliance Retirement Fund, an equity-oriented fund.However, ELSS schemes and Ulips can be used for the same purpose.

Smart tip: Wait for the launch of retirement funds and assess their performance before investing.

INSURANCE PLANS

Rating: 1

Traditional insurance plans are the worst way to save tax. Returns 5.5-6%. They require a multi-year commitment and give very poor returns. The insurance for 20 year regulator has introduced some plans customer-friendly changes but these plans still don’t qualify as good investments. The only good thing is that the income is tax free. But then, so is the income from the PPF and tax free bonds. Another positive feature is that you can easily get a loan against such policies, which gives some liquidity to the policyholder.

Smart tip: If you have a high-cost insurance plan, turn it into a paid-up policy to ease the premium burden.

Source : http://goo.gl/lAQFGL

ATM :: Retire rich: Supplement your Provident Fund with other high-yielding options

Preeti Kulkarni, ET Bureau Nov 10, 2014, 01.34PM IST | Economic Times
ATM
If you dream about a comfortable retirement but are planning to depend solely on your Provident Fund (PF) to meet your needs, be ready for a shock. The PF can be an important pillar in a retirement plan, but the corpus of the average subscriber is likely to fall woefully short of his requirement. One needs to make additional investments to build a corpus big enough to sustain one’s expenses for 20-odd years after retiring.

To be fair, the Provident Fund’s design makes it the most effective way to save for retirement. You start contributing from the very month you start earning, and since it is a compulsory saving, you can’t avoid it. Besides, your contribution is linked to your income and rises with every increment in your salary. If a person takes up a job at the age of 25, even a modest contribution of Rs 5,000 a month and a matching contribution by his employer can build up a massive corpus of Rs 6.89 crore over 35 years. This calculation assumes that his income (and, therefore, the contribution) will rise by 8% every year and the PF will give 8.5% returns.

While the figure of Rs 6.89 crore may appear huge, it may not be enough. If you need Rs 50,000 a month for living expenses today, a 7% inflation would push up the requirement to roughly Rs 5.34 lakh a month in 35 years. When you are 60, you would need a corpus of Rs 10.52 crore to sustain inflation-adjusted withdrawals for the next 20 years (see table). Assuming a post-tax return of 8.5% and 7% inflation, the Rs 6.89 crore from the PF would be completely wiped out in a little over 12 years. This could mean having no money in your retirement account at the age of 72.

There’s another problem. To make your PF work for you, you must remain invested for the long term. However, a lot of people withdraw their PF when they change jobs, thus losing out on the power of compounding. “In India, the PF is often used for other purposes, particularly when people change jobs. They end up withdrawing this accumulated corpus to buy expensive gadgets or go on a holiday, forgetting that the purpose was retirement planning,” says Arvind Usretay, India Retirement Business Leader, Mercer. A recent global survey by Mercer has ranked India’s retirement system the lowest among the 25 countries surveyed. “What continues to hold India back is the lack of retirement coverage for the informal sector and less than adequate retirement income expected to be generated from contributions made to the Employees’ Provident Fund (EPF) and gratuity benefits,” notes the Mercer study.

Another global study by Towers Watson points out that a significant majority of employees sees their employer retirement plans as the most important source of income in retirement. “Employers must educate their employees on the need for retirement planning and provide them the tools to help them save adequately,” says Anuradha Sriram, director, benefits, Towers Watson, India.

To ensure a comfortable life in retirement, one needs to make additional investments to build a corpus big enough to sustain one’s expenses for nearly 20 years in retirement. Here are a few options you can consider.

Mutual funds

Mutual funds are, perhaps, the best way to supplement your retirement savings. Among these, equity mutual funds have the potential to give very high returns, but also carry high risk. They are best suited to younger investors who can withstand short-term volatility to earn long-term gains. “Equity funds should be the instrument of choice for young investors who have 25-30 years to build a retirement kitty,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories. An additional advantage of investing in equity funds is that the gains are tax-free.

If you are averse to taking risks, consider a balanced fund, where the equity exposure is lower. Ultra cautious investors can go for MIPs of mutual funds that invest only 15-20% of their corpus in stocks and put the rest in bonds. However, the returns of MIPs will not be able to match those of equity and balanced funds.

Ulips

Ulips have earned a bad name because of the rampant misselling in the past. However, this much reviled product can be a good option for retirement planning. In recent months, insurance companies have come out with online plans that levy very low charges. The Click2Protect plan from HDFC Life charges an annual fund management fee of 1.35%, which is less than the direct mutual fund charges. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn’t have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don’t have lower charges but compensate long-term investors with ‘loyalty additions’. The best part in a Ulip is that one can shift money from debt to equity, and vice versa, without incurring any tax liability. The corpus is also taxfree on maturity.

Source : http://goo.gl/y5gCLT

ATM :: Why you should invest in Ulips now

Narendra Nathan | Oct 6, 2014, 07.04AM IST | Times of India
Recently launched Ulips have very low charges. Find out why you should buy these insurance-cum-investment plans now
ATM
They were once the most bought financial product. Then Ulips became the most reviled investment, forcing a string of reformatory measures. Now these investment-cum-insurance plans have changed once again to become a low-cost investment option. In fact, some of the Ulips introduced in recent months are cheaper than the direct plans of mutual funds.

We won’t be surprised if this evokes an angry response from readers. Ulip became a four-letter word due to the high charges levied by insurance companies and rampant mis-selling by distributors. In some cases, the charges were as high as 80% of the first year’s premium. Distributors lured gullible investors by not revealing the high charges and showcasing only the returns offered by the market-linked product.

The Insurance Regulatory and Development Authority (Irda) clamped down in 2010, capping the annualised charges of Ulips at 2.25% for the first 10 years of holding. The charges were fixed at this rate because it was the average cost charged by competing products such as mutual funds. With no incentive left for distributors, Ulip sales plunged.

In recent months, insurance companies have sweetened the deal for investors by reducing the charges even further. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn’t have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don’t have lower charges but compensate long-term investors with ‘loyalty additions’.

But the Click2Invest plan from HDFC Life is a game changer. The only charge it levies is an annual fund management fee of 1.35% of the corpus value. There is also a mortality charge but that is for the life cover offered to the policyholder. The low charges make the Click2invest plan cheaper than even the direct plan of a diversified equity fund. For instance, the direct plan of the largest equity scheme, HDFC Equity Fund, charges an expense ratio of 1.5% per year.

Some readers may pooh-pooh the idea of saving a sliver on costs. After all, a 0.15% saving on costs makes a difference of only `150 on an investment of Rs 1 lakh. While this may seem small, the difference in the cost can balloon into substantial savings in the long term.

Shed your aversion to Ulips

This transformation of Ulips from a costly bundled product to a low-cost option has led to a change of heart among financial planners as well. For long, they have advised clients to keep insurance and investment separate. Says S Sridharan, head of financial planning, FundsIndia. com. “Low-cost products like this will be suitable for investors who want to combine insurance with investments,” he adds.

He’s not alone. With more low-cost Ulips on the anvil (at least two companies are awaiting Irda’s approval for their low-cost Ulips), many financial planners are changing their tune. “The Click2Invest plan from HDFC Life is a good product. We are recommending it to our clients,” says Jaya Nagarmat from Investor Shoppe. Tanvir Alam, founder & CEO of Fincart goes a step further. “This Ulip will give the mutual fund industry a run for its money,” he says.

Indeed, it is time to get rid of the historical aversion to Ulips and look at them through the prism of lower charges. This will not be easy because a lot of investors have been scarred by their experience with Ulips. Many have lost ously, the mortality charges are higher when it comes to such plans.

Though Ulips offer a cover to policyholders, the benefit may be a drag for those who are interested purely in investment. The low-cost Ulips are, therefore, Type I plans that will pay either the fund value or the sum assured. Here’s how it will work. Suppose a person buys a Ulip with a Rs 1 lakh premium for 20 years. The plan will give him a cover of Rs 10 lakh (10 times the annual premium), but the insurance company will charge mortality premium for only Rs 9 lakh since the total risk for the company is Rs 9 lakh. With every annual payment of the premium, the risk of the company will come down, reducing the mortality charge. When the fund value of the Ulip exceeds the sum assured, the plan will stop deducting mortality charges and the entire premium will go into investment.

Another way to reduce the impact of mortality charges is to buy the policy in the name of your spouse or child. Income from investments made in the name of a spouse or a child are subject to clubbing provisions, but since the maturity proceeds from Ulips are tax-free, you don’t have to worry about that. You can also go for single premium Ulips, with an insurance cover of only 1.25 times the premium. However, the maturity proceeds of such a plan will not be covered under Section 10 (10D) and will be taxable in your hand.

money due to the doublespeak of distributors and the failure (or unwillingness) of insurance companies to redress their grievances. Policyholders lost money even though the markets were shooting up. Buyers didn’t realise that even though their funds went up by 15-20% in a year, they were suffering losses because only 40-50% of their money was actually invested in the first 2-3 years. “The new Ulips are facing the baggage of old Ulips,” says Yashish Dahiya, CEO and co-founder Policybazaar.com.

The tax advantage

While the low charges of new Ulips make them attractive, the main advantage is the seamless and tax-efficient transfer from debt to equity, and vice versa. This switching may be for varied reasons, including rebalancing the portfolio or even timing the markets by savvy investors.

“Though retail investors may not have the bandwidth to switch on the basis of market views, people who are aware can make use of this facility very effectively,” says Alam. It is important to note that Ulip is not just about equities. Smart investors can also move within debt, shifting to long duration funds when interest rates are expected to go down and moving to short-term funds when rates are on the rise. If mutual fund investors do this, they will have to pay tax on the short-term and long-term capital gains made on the fund. Since Ulips are insurance plans, the gains and maturity proceeds are tax-free under Section 10(10d).

However, the sum assured must be at least 10 times the annual premium for this tax benefit. This year’s budget has changed tax rules for debt funds. The minimum holding period has been increased from one year to three years. Debt fund investors will have to pay higher tax if they rebalance by shifting out of debt within three years of investing. However, there will be no tax in case of Ulips. Investors should note that insurance companies allow only a limited number of free switches. While some Ulips allow unlimited free switches, others permit only 4-12 free switches in a year. There is a Rs 100-250 charge for every switch beyond the free limit. Like banks, insurance companies also charge you less if you do the transaction online. For example, HDFC Click2invest charges Rs 250 per additional switch if done offline and only Rs 25 if the same is executed online.

Decoding the charges

The charge structure of Ulips is not as straightforward as that of mutual funds. There is a premium allocation charge, a policy administration charge and a fund management charge. There is also the mortality charge for the life cover offered by the plan. The 2010 Irda guidelines say that the combined charge cannot be more than 2.25% a year in the first 10 years. They have also capped the fund management fee at 1.35% per annum, though many Ulips are charging less than that on their short-term debt schemes.

The mortality charge differs across Ulips. Some plans offer either the sum assured or the fund value on death. These are Type I Ulips and their mortality charges go down as the fund value goes up. The Type II Ulips offer both, the fund value as well as the sum assured. Obviously, the mortality charges are higher when it comes to such plans.

Though Ulips offer a cover to policyholders, the benefit may be a drag for those who are interested purely in investment. The low-cost Ulips are, therefore, Type I plans that will pay either the fund value or the sum assured. Here’s how it will work. Suppose a person buys a Ulip with a Rs 1 lakh premium for 20 years. The plan will give him a cover of Rs 10 lakh (10 times the annual premium), but the insurance company will charge mortality premium for only Rs 9 lakh since the total risk for the company is Rs 9 lakh. With every annual payment of the premium, the risk of the company will come down, reducing the mortality charge. When the fund value of the Ulip exceeds the sum assured, the plan will stop deducting mortality charges and the entire premium will go into investment.

Another way to reduce the impact of mortality charges is to buy the policy in the name of your spouse or child. Income from investments made in the name of a spouse or a child are subject to clubbing provisions, but since the maturity proceeds from Ulips are tax-free, you don’t have to worry about that. You can also go for single premium Ulips, with an insurance cover of only 1.25 times the premium. However, the maturity proceeds of such a plan will not be covered under Section 10 (10D) and will be taxable in your hand.

Before you buy a Ulip take this short test to know if you should buy such a plan

You already have adequate life cover

You typically need an insurance cover of 5-6 times your annual income. This entire insurance need may not come from a Ulip, so buy a term cover before you consider buying a Ulip.

You understand that Ulips are market-linked products

Like mutual funds, Ulips also invest in the markets. Be prepared for the market risk that the investment will be exposed to. Not only equity funds but even debt funds can decline in value.

You know that exiting in 5-6 years will not yield desired results

Ulips were mis-sold as investments you can exit within three years. The lock-in period has been extended to 5 years but to get the best out of the Ulip, you need to hold it for at least 12-15 years.

You know how to use the switching facility

The switching facility of a Ulip is a key feature that differentiates it from a mutual fund. You can shift money from debt to equity, and vice versa, depending on your reading of the market.

You can afford to pay the premium for the entire term

As mentioned earlier, it is important to continue investing in a Ulip through the term of the plan. Buy a policy that you can continue for the full term without impinging on other financial goals.

You know the tax rules relating to the plan

If the life cover is not 10 times the annual premium, you won’t get any tax deduction and the corpus will also be taxable on maturity. Also, the deduction under Sec 80C is capped at Rs 1.5 lakh.

Source : http://goo.gl/98lXbk