Reasons Why ULIP is Anytime Better than the Bank RD & Postal RD

When it comes to financial planning and investment, choosing the right instrument is crucial. Among the many options available in India, LIC (Life Insurance Corporation of India) ULIPs (Unit Linked Insurance Plans) often stand out as a versatile and potentially rewarding choice. In this blog, we will explore why LIC ULIPs are a favorable option compared to traditional investment options like Post Office and Bank Recurring Deposits (RDs).

We get Bank & Post office RD with fixed interest rate, where our returns are assured after the defined time period of RD, but in ULIP it depends on the kind of fund we have selected for our self. There are 4 different kind of fund in which LIC of India ULIP deals. We will mention them in sequence of decreasing returns. Growth fund, Balanced Fund, Secured Fund and Bond Fund. To understand them in a better way, Lets look at the below table

Expected Returns under different funds are as below

1.    Growth - 15% with Highest risk, as majority is invested in equities.

2.    Balanced- 12% with Moderate risk, as its having combination of equities and debt.

3.    Secured - 10% with Low risk, as investment happens in govt bond and money market                                    instruments.

4.    Bond - 8% with Lowest risk, as investment happens in long term govt bonds.

Lets compare a Bank/Post Office RD with ULIP policy for 10 year investment with a monthly investment of Rs 4000/- and find out which one is better in terms of liquidity, return , tax benefit and risk cover.

Bank/Post Office RD

Return Calculation

1.     Investment of 4000/Month
2.     Total Investment in 5 years = 2,40,000/-
3.     Prevalent interest rate = 6.5% to 7% ( Source - https://www.bankbazaar.com/recurring-deposit/banks-offer-highest-recurring-deposit-interest-rates-in-india.html ) . We will consider higher interest rate of 7% for calculation.

4.     Total Return on investment after 5 years at 7% = 2,86,394/-

Please note the return mentioned above can be gained, if one regularly invests for                 entire period,    

Liquidity 

Money from Bank/Postal RD can be taken out any time with penalty of 0.5% on premature withdrawal of deposit.

Input Tax Benefit

There is no tax benefit under section 80C, if you invest in Bank/Postal RD for 5                  years or more period. 

Maturity Tax Benefit

Interest accrued over the period of time will be taxed as per the income tax slab of             depositor. If Pan card is submited than TDS will be 10%, otherwise TDS will be 20%.

LIC of India ULIP

Return Calculation

As we have seen it earlier, the returns are not guaranteed in the ULIP, but its sure that the returns will be always higher than the Bank/Postal RD. Lets witness it considering calculation for different funds

 
Returns in ay of the segment is much higher than the Bank/Postal FD. but if we want risk averted high returns than one should select Balanced fund (which gives portion of  secured returns of debt instrument and portion of high returns of equities). This is being balanced by fund manager considering the valuations of the market. If market valuations are very high than fund manager decides to reduce equity % and increase debt %( as per specified limits). And if the equity market crashes, than fund manager purchases funds at a very low rates and reduce debt % and increase equity %.

Also there is an additional feature available in ULIP , that is insurance. Even with a single premium deposit, if policy holder dies due to accident or natural death, than nominee will be given 10 times of Annual premium. For Eg- with 4000 monthly premium. Risk cover will be of 4,80,000/-.

Liquidity 

In ULIP IRDA(Insurance Regulatory & Development Authority) has defined a lock in period of 5 years. This means the policy cant be surrendered or withdrawn before 5 years tenure. Even if someone wants to surrender the policy the redemption will happen at the end of 5 policy years.

But after 5 years if policy holder wants, he can fully or partially withdraw the money based on his requirement. With partial withdrawal risk cover will continue for the policy period. But if policy is surrendered than the risk cover will immediately finish.

Important point is in ULIP that even with surrender after 5 years the entire encashment value will be completely tax free. 

Input Tax Benefit

For ULIP, the premium paid are eligible for the tax benefit under section 80C. So its advisable for an individual whose 80C limit is pending to get utilized. 

Maturity Tax Benefit

All ULIP policy where the risk cover is 10 times the annual premium are having maturity completely tax free. So this makes ULIP again more attractive than Bank/Postal RD and Mutual Funds.

Conclusion 

Its Evident from the above small analysis that ULIP's are anytime better than the Bank/Postal RD in terms of Returns generated by them, 80C input tax benefit and Maturity amount tax free. Only drawback with ULIP is that there is lock in period of 5 years against RD of 5 years. 

In my Opinion if an investor is fan of Bank/Postal RD, than he should seriously give thought about the ULIP(Unit Linked Insurance Policy) and enjoy the benefit of Life Insurance and get returns which can beat inflation.