You must have heard of ULIPs(Unit Linked Insurance Plans), which are hybrid life insurance products that combine insurance and investments. They are increasingly popular options for people nowadays. However, they often come up against the ever-reliable FD or Fixed Deposit, which is still regarded as one of the country’s safest and most trusted investment options. So which one should you choose? Here’s the lowdown.
FD vs. ULIP- Differences Worth Noting
|Fixed Deposit (FD)
|ULIP (Unit Linked Insurance Plan)
|An FD or fixed deposit is a fixed-income instrument. It is offered by banks and other financial institutions where investors earn higher interest as compared to rates offered on savings bank accounts
|ULIPs or Unit Linked Insurance Plans combine investment and insurance for policyholders. They get life insurance coverage for the policy’s tenure while earning returns through investments made in various market-linked instruments.
|Investors put in a lump sum amount for a certain period, and the interest accumulates till the maturity date. They can also choose to withdraw the interest at regular intervals as a form of income.
|Your money will be invested in liquid, equity, debt, and sometimes balanced funds, which are a mixture of both. You can allocate varying proportions to equity and debt, depending on your life stage, risk appetite, and your desired returns in the future. In addition, customers can flexibly switch across funds based on their performance and market conditions.
|Lock in Period
|The lock-in period for an FD account coincides with the deposit tenure or maturity period. Tax Saver FDs do have a fixed lock-in period of 5-years.
|ULIPs come with lock-in periods of five years with monthly/annual premium payment options in most cases.
|Withdrawing or breaking an FD before the maturity date may lead to charges/penalties imposed by the bank/financial institution. You can only withdraw after the maturity of the FD.
|No withdrawal from the accumulating corpus during the lock-in period is allowed. After this period ends, you can make partial withdrawals from the corpus, subject to the term and conditions set by the insurer.
|Only investments in special FD accounts, called Tax saver FDs are eligible for tax deductions (upto Rs. 1.5 lacs) under section 80C of the Income Tax act. These schemes are offered by most banks and come with 5-year lock-in periods.
Do note that the interest earned under an FD is taxable, except in the case of Non-Resident External (NRE) and Foreign Currency Non-Repatriable (FCNR) FD accounts. These FDs can be opened by NRIs and offer tax exemptions on the interest earned under Section 10(4) of the Income Tax Act.
|They come with tax benefits (on the premiums paid) under Section 80C (up to Rs. 1.5 lakh) of the Income Tax Act. The earnings on the plan are also free from taxes under Section 10D. The amount paid out to the beneficiary of the policyholder in the event of their demise within the policy period is also free from taxes as per Section 10D of the Income Tax Act.
|FDs do not come with any accompanying life insurance or coverage in most cases, nor are any death benefits paid to the nominees.
|ULIPs do have accompanying life insurance coverage throughout their entire tenure. Upon the demise of the policyholder, the sum assured or accumulated fund value (whichever is more) is paid out to the policyholder’s nominees.
FDs are completely insulated from market movements. While their interest rates are lower than many other avenues, these are one of the safest options for completely risk-averse investors. On the other hand, ULIPs are great for meeting long-term goals like buying a house, planning for retirement, or your child’s future education or marriage. You can amass a sizable corpus that is paid out on maturity. This will also help you keep pace with inflation while meeting all your needs smoothly in future years. You may use ULIP calculators to determine the returns from a particular policy.
Which one should you choose?
Should you choose a ULIP or an FD? A fixed deposit is usually a safe investment that does not depend on market returns. However, the returns are sizably lower than those offered by ULIPs in most cases. At the same time, FDs do not give you any additional benefits like life coverage and the payment of a sum assured to your nominees in the event of your unfortunate demise.
Hence, many investors choose ULIPs as better options for gaining insurance coverage and growing their wealth simultaneously. ULIPs can also enable flexible switching of funds to minimize risks and employ better strategies to earn higher returns based on market trends. In fact, you can choose the fund types while investing in ULIPs. Hence, you can go for a higher allocation to debt funds in your portfolio for minimizing risks. This can be done either in response to market conditions, or even with age and growing financial responsibilities. A mixture of funds naturally evens out the risks over a longer period. Moreover, they come with significant tax deductions and also enable higher returns. In addition, there may be several other loyalty bonuses/additions for customers in many ULIPs. This helps boost the fund’s value while loyalty additions apply for plans with tenures of ten years or more.
The longer you stay invested for, the better your chances are of earning higher returns. Also, switching funds helps lower risks to the portfolio during bear markets while switching to higher-performing funds during bull runs. Many insurance providers/companies also offer professional management and assistance solutions for ULIPs.
These are some of the biggest reasons for choosing Unit Linked Insurance Plans or ULIPs over Fixed Deposits (FDs). They are better suited for the current scenario, where inflation rates are skyrocketing yearly without proportionate income increases for many individuals. Hence, they can ensure greater peace of mind with life coverage (safeguarding your family’s financial future) and help you meet future goals through long-term wealth creation.