Be careful while choosing the premium payment term and redemption mode and frequency
Saving for retirement should, ideally, be one of the top financial goals. It is important not only to build a corpus large enough to give you a regular income post-retirement but also to ensure tax-efficient returns. This is where the new age Unit Linked Insurance Plans (Ulips) from life insurance companies can help you. Let us see how they work.
Features of whole-life Ulips
Whole-life Ulips are investment linked insurance plans that offer protection and investment benefit, till the age of 99 to 100 years. "You enjoy flexibility of choice vis-à-vis cover and investments (equity or debt) made in-line with your risk profile and financial goals,'' says C S Sudheer, CEO and founder of IndianMoney.com.
Santosh Agarwal, chief business officer, life insurance, Policybazaar.com says, "While investing in an ordinary Ulip, you are covered by a life insurance policy providing your beneficiaries death benefit, but the new whole-life Ulips takes care of your living benefit as well, which is your retirement.''
In a whole-life Ulip, you can choose till what age you want to save money, or accumulate money. This could be till retirement. After this, you can choose to take the corpus through a Systematic Withdrawal Plan which will act as your income in the retirement stage.
"You have the flexibility to decide your retirement age as well as the premium payment term. You can also plan in what frequency you want returns - monthly, quarterly or half-yearly. These returns are completely tax-free. You also have the flexibility to increase or decrease the income (return amount) at a later stage. It is also possible to withdraw the entire corpus, say during an emergency,'' says Agarwal.
The tax arbitrage that the whole-life Ulip enjoys over other retirement plans is the biggest advantage says Dheeraj Sehgal, chief distribution officer – institutional, Bajaj Allianz Life Insurance, which recently introduced a whole-life Ulip.
"Since it offers a life insurance cover that is 10 times the premium, it does not attract any taxation when you redeem or withdraw the money. In case of other retirement products, there will capital gains (mutual funds) or you will be taxed as per your income slab (income from annuity linked to insurance pension plans),'' he points out.
Some companies that offer whole-life Ulips are Bajaj Allianz - Longlife Goal, HDFC Life - Click2Wealth, Max Life Insurance - Online Savings Plan Retirement, Canara HSBC Oriental - Invest 4G-Whole Life, Edelweiss Tokio Life - Wealth Ultima.
Bajaj Allianz offers return of mortality charge. After the tenth year the mortality charge is paid back every five years. Since there is no policy administration charge, or premium allocation charge, the effective charge works out to only 1.35%, which is the fund management charge.
Whole-life Ulips score over other products
According to Sudheer, whole-life Ulips score over pension plans because the former invest in equity, giving a higher corpus at retirement. Since pension plans are mandated to give a non-zero positive return on maturity/death of the investor, they cannot invest in equity.
In case of pension plans, you have to compulsorily purchase annuity plans with one-third corpus. "The pension payments from annuity plans are taxed and annuity plans offer low returns. Since the withdrawal from whole-life Ulips are tax-free it is suitable for those between 30 and 40 years for legacy planning and those above 40 years for retirement planning,'' he adds.
Retirement plans by mutual funds do score over whole-life Ulips on cost and transparency. They can also ensure a huge retirement corpus as they have a higher exposure to equity. But mutual fund returns are also taxed and this is where whole-life Ulips score over them, Sudheer points out.
Keep in mind
Be careful in choosing the premium payment term and frequency of withdrawal. "I would recommend the longest term possible for accumulation phase (premium payment). Be careful in deciding the policy term and if you want lump sum or systematic withdrawal and the frequency,'' says Sehgal.
Whole-life Ulips have higher costs in the initial years, but the cost falls gradually. You will have to stay invested for 15 years or more to bring down the costs of the whole-life Ulips, says Sudheer.
"If you avail whole-life Ulips at a higher age (say 45 to 50 years), mortality charges would be high. Whole-life Ulips are good for retirement, but do look to diversify across pension/retirement plans," he adds.
BUILD NEST EGG
- Whole-life Ulip takes care your living benefit, that is, retirement and provides tax-free income, unlike pension plans
- Whole-life Ulips have higher costs in the initial years, but the cost falls gradually. Stay invested for 15 years or more to bring down the cost
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