You are faced with a dilemma: Your insurance advisor asks you to start a ULIP for better growth, but you wish to create a fixed deposit for 10 years. Let’s check what both options can do.
Understanding ULIPs and FDs A Unit Linked Insurance Plan (ULIP) is an insurance-cum-investment option, which offers life coverage as well as controlled exposure to the markets. Thus, your investment in the plan is partially diverted to a mix of high grade securities to secure growth for your money. A bank FD, is a sum of money that you set aside with the bank at a certain rate of interest for a fixed tenure. At the end of the tenure, you receive your entire principal plus the interest earnings on it. A ULIP plan… * Flexibility of investment: ULIPs offer a high degree of flexibility, by letting you choose a plan as per your risk appetite and future goals. You can switch funds based on your investment objectives and market trends – this means you can exercise control over the final growth of your investment. * Risk is spread: There is always some element of risk in market-linked instruments. However, the risk is spread when the tenure is longer, and this is true in the case of unit linked insurance plans. * Gradual savings lead to bumper rewards: By staying invested in a ULIP policy for 10 years, your investment grows with focussed savings into a large amount of money that fulfils future objectives easily. * You can withdraw money against it: After the cut-off period of 5 years, you may borrow money against the ULIP plan if you need funds. * The premiums are tax-exempt: Premiums paid are tax deductible under Sec 80C of the Income Tax Act, 1961. Whereas, a 10-year Fixed Deposit… * Offers predictability: You know how much your deposit will grow even before you invest in it. The interest rate offered on the FD is unchanged despite changes in market rates during the FD’s tenure. * Provides loan against the deposit: You can borrow a loan against the deposit instead of prematurely withdrawing it, if you need money. You may borrow up to 90% of the deposit amount as a loan. You may repay the loan and choose to renew the FD at time of maturity. * The income is taxed: However, the biggest drawback of creating the FD is that the interest earning on it is taxed 10% TDS if it exceeds Rs 10,000 in a year. This is a loss especially when you create a long tenure FD. Meanwhile, you can get around this situation by creating a 5-year tax saving FD and then renewing it for a further 5 years. * Returns are not always high: The returns on FDs are not always commensurate with inflation. So even if you get a good corpus at maturity, it may not be high enough to make future plans with. Based on the information above, we recommend choosing ULIP policies for their potential to create wealth without the tax burden.
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