In this video, we will discuss the switching facility in ULIPs (unit linked insurance plans)
ULIPs allow you to invest in equity and debt markets and also provide life insurance
ULIPs provide a lot of flexibility to the policyholder
In ULIPs, the policyholder has to choose allocation among equity, debt and money market funds
Equity funds invests in equity markets, debt funds invest in various bonds and money market fund or liquid funds that invest in the money market securities that have a maximum tenure of 1 year
The allocation among various funds is typically chosen at the time of buying the ULIP
During the ULIP term one can change the allocation to equity fund, debt fund and liquid fund from time to time depending on market conditions and need
This facility or switching facility is used by making an application to the life insurance company
Life insurance companies allow certain number of switches free of cost. Some companies allow 5 free switches in any policy year while others give up to 8 switches
Beyond that threshold limit, charges are made and adjusted with ULIP units
ULIP proceeds ad death benefit are tax free regardless of the investment in any kind of ULIP fund
While movement from ULIP funds is tax free, in mutual funds the tax is according to the mutual fund category like equity fund or debt fund
This includes long term capital gains (LTCG) tax and short term capital gains tax for equity funds and debt funds
ULIPs allow you to move your money from higher risk investments like equity funds to lower risk debt funds, about 3 years from the time you need money
Nearer to time of use, you could move the money to liquid funds. Unlike mutual funds, taxation is not happening in ULIPs
This de-risking of gains from ULIP equity funds is a tax free process whereas it is not so in case of mutual funds
Both mutual funds and ULIPs have their pros and cons and it depends on the individual to check which combination of features work for them
You also need to check whether you would like to foot some of the ULIP charges