A lot has been written on why ULIPs are expensive and how Mutual Funds combined with term plan provide a low cost insurance cum investment option. However, this choice ignores the important element of taxation here.
1. ULIP offer a fund of funds option. That means, you can switch between debt fund to equity fund and vice versa, without an incidence of taxation. In mutual funds, that is a major hindrance. The moment you switch, you need to pay short or long term capital gains (on debt schemes currently). Fund of funds options from mutual funds don't give a choice to an investor, the choices are automatically determined based on valuation (Dynamic PE fund) or fixed allocation is used.
2. Returns from ULIP are tax free as long as sum assured is 5X the annual premium.
With new direct tax code (if it becomes law in its current form), mutual funds will become unattractive from tax savings perspective, both short and long term capital gains will attract marginal tax rate. Also, ULIPs will require 20X annual premium as the sum assured. On that other hands, fund management charges for ULIPs must decline below 1.35% (after IRDA norms) effective 1st Jan, which is significantly cheaper than mutual funds.
I am therefore seeking a low cost ULIP plan which also has low mortality charges (20X cover).
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