Take this short test to find out if you should buy a ULIP

At least there is one lot happy with the new long-term capital gains (LTCG) tax being proposed on equity investments in the Budget. Insurance companies have been quick to jump onto to this opportunity and have started highlighting the tax-free nature of unit-linked insurance plans (Ulips). But before you get go out there and invest in one, take this quiz to find out if it indeed fits in your investment portfolio.

1. Do you have adequate life insurance cover?
You typically need an insurance cover of 7-8 times your annual income. A Ulip may not be able to cover this fully, so buy a term cover before you buy a Ulip.
Yes or No


2. Do you know that Ulips are market-linked products?
Like mutual funds, Ulips also invest in the markets. Be prepared for the market risk that the investment will be exposed to. Not only equity funds but even the debt funds can decline in value.
Yes or No

3. Do you know that exiting in 5-6 years won’t yield desired results?
Ulips have a lock-in period of 5 years but this does not mean that you should quit when it is over. To get the best out of the Ulip, hold it for at least 12-15 years.
Yes or No

4. Do know how to use the switching facility?
The switching facility is a key advantage of a Ulip. You can use it to shift money from debt to equity, and vice versa, without incurring a tax liability.
Yes or No

5. Can you afford to pay the premium for the entire term?
As mentioned earlier, it is important to continue a Ulip for the full term. Buy a policy that you can continue for the full term without impinging on other financial goals.
Yes or No

6. Are you aware of the tax rules relating to the policy?
If the life cover is not 10 times the annual premium, you won’t get any tax deduction and the corpus will also be taxable on maturity.
Yes or No

If even one of these questions is answered with a ‘no’, you should avoid buying a Ulip.