Planning for the future could be likened to deciphering a coded script. Everyone insists that you must save money and grow your wealth to secure your family’s future. With so many financial instruments in the market, it’s hard to pick the right one. Now, when the discussion of long-term financial solutions arises, two investment avenues stand out: The Unit Linked Insurance Plan (ULIP) and the most popular best savings plan in India.
Both ULIP and traditional savings plans offer life insurance coverage with the power of money saving. Yet the manner in which they operate is vastly different. Knowing their differences enables you to make a well-informed decision.
What is a ULIP?
A ULIP plan is a dual-purpose financial product. Part of your regular premium due towards a ULIP gets invested into a life cover for your family, while the rest gets put into multiple funds. The latter part of your money is allocated into equity funds, debt funds, or a mixture of the two, based on your risk appetite.
Since a part of your money goes directly into the stock market, your returns would be dependent on the performance of the stock market. Hence, you bear the risks of market fluctuations.
Key Features of a ULIP
- Fund Switching: Most ULIP policies allow switching between equity funds and debt funds as and when necessary, depending on the needs of the market.
- Lock-in Period: ULIP policies usually entail a mandatory five-year lock-in period, with no premature withdrawal of your money allowed.
- Transparency: The fund managers offer regular disclosure of the value of your fund units and the performance of the fund.
What is a Traditional Savings Plan?
Traditional savings plans prioritize your safety above all else. They are for those who can’t take the risks of the market but desire life insurance coverage. Traditional savings plans invest your money into secured, fixed-income-bearing assets.
While they provide you with a sense of reliability and reassurance, you must realize that these plans don’t promise you handsome returns. Your money is safeguarded from the market’s vagaries.
Key Features of Traditional Savings Plans
- Guaranteed Payouts: The guaranteed payout rider ensures you get minimum maturity/survival benefits at the time of maturity and survival, respectively.
- Minimal Risk: The funds are put into fixed-income assets, so your principal investment is secure.
- Discipline: The need for regular premium payments compels you to put aside money for the long-term consistently.
Understanding Tax Rules
The applicability of tax deductions plays a significant role in deciding the viability of an investment. As per the provisions of the New Income Tax Act, 2025, the tax applicability is contingent upon your choice of the investment plan and the amount of your premium.
For ULIP, the premiums paid towards eligible ULIP policies could enable you to claim a deduction from your taxable income under Section 123 of the New Income Tax Act, 2025, up to a maximum limit of ₹1.5 lakh per financial year, subject to fulfilling the prescribed conditions like the ratio of the premium to the sum assured. However, with respect to maturity proceeds for the policies issued after 1st Feb, 2021, the tax exemptions would only apply if your aggregate annual premium across your policies doesn’t exceed ₹2.5 lakh. If the total annual premium across your policies exceeds ₹2.5 lakh, the maturity gains would be treated as capital gains and taxed accordingly.
In case of traditional savings plans, the maturity benefits are generally tax-exempt under specific sections of the tax law, provided that the annual premium doesn’t exceed 10% of the total sum assured. The death benefits payable to your nominee under both traditional and ULIP savings plans generally remain exempt from income tax, ensuring your loved ones don’t face any financial strain at their time of need. Tax rules keep changing, and individuals’ tax brackets also differ, so it is always a good idea to consult a certified tax expert or refer to the latest official guidelines before finalizing your decision.
Which Option Suits Your Goals?
Your financial goals determine the kind of investment you should make. Opt for a ULIP if you have a long-term goal that entails a period of at least 5-10 years, you wish to beat inflation by allowing your money to grow at a higher rate via the equity market, and you’re willing to monitor the performance of the market and ride its ups and downs.
Go for a traditional savings plan if your primary objective is the safeguarding of your capital, you wish to achieve specific milestones in your life such as your child’s college education or retirement and market fluctuations make you anxious.
Each insurance product comes with its fair share of special terms and conditions, underwriting, and charges, so take your time and read the policies’ terms and conditions to evaluate your preferences, risk tolerance, and life stage before investing.
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