Unit Link Insurance Plan ( ULIP )
ULIP full form is Unit-Linked Insurance Plan. Apparently, it’s not too difficult to understand ULIP meaning. It is a unique insurance plan that is linked to the capital market and invests a part of the premium in qualified investment instruments such as stocks, bonds or mutual funds.
What is ULIP?
Unit Linked Insurance Plan or ULIP is a combination of insurance and investment. In this way, from ULIP an investor can fulfill his/her goal of wealth creation as well as life cover. Basically, the insurance company from which one takes the ULIP, invests a portion of his/her money in life insurance and the remaining money is invested in fund that can be debt, equity, or both to match his/her long-term goals. These goals can be children’s higher education, retirement planning, or other important event of one’s life for which he/she may want to save for. So, in order to know what is ULIP one should understand it as a combination of insurance and investment.
ULIP was first launched in India by UTI (Unit Trust of India) in 1971, followed by LIC ULIP plans launched by LIC Mutual Funds in 1989. As a concept, ULIPs are quite similar to the traditional endowment plans. But the traditional endowment plans are mostly opaque with no clarity on the charges, the premium allocated towards investment and the insurance cover, and the returns accumulated on the investment.
On the other hand, ULIPs are much more transparent. Charges including allocation charges, fund management charges, etc. is clearly stated upfront. Investors, buying ULIP plans, may choose to switch their investment from equity and debt and vice versa, without having to worry about being charged and without running from pillar to post. In fact, investors are allowed to manage both their investment and the protection part as per their individual requisites, necessities, and choices under a single integrated plan.
Key Features of ULIP Plans
ULIPs come loaded with a host of features to help investors ensure financial security against all future adversities, grow their wealth manifolds, and enjoy tax benefits. No wonder, ULIPs remain the investment instrument of choice for both seasoned and novice investors. Here is a little list of just some of the many key features of ULIP plans that gives it an extra edge over the other investment tools.
Liquidity is referred to as the degree to which the investment can be quickly cashed out without affecting the value of the return. Most ULIP plans have a lock-in period of just 3 to 5 years to ensure utmost liquidity. This means investors can make partial or full withdrawals, after the completion of the lock-in period, whenever they need their investment back. Here it is important to remember that the degree of liquidity provided by ULIP plans varies from insurer to insurer.
Transparency is perhaps the key highlights of ULIP plans. Unlike most other insurance products and investment instruments, there are no hidden charges and all charges including allocation charges, fund management charges, policy admin charges, etc. are clearly stated upfront. Informative product brochures and the free-look period ensure that the investors are double-sure before they investing their hard-earned money in ULIP plans.
Unlike the traditional insurance products, ULIPs also offer a greater level of control to the policyholders. Investors can easily manage both their investment and the insurance cover according to their needs, requisites, and preferences under a single integrated plan. Not only this, ULIPs also allow investors to switch their investment from debt fund to equity fund and vice versa, without being charged an extra fee.
Yet another key feature of ULIPs is that these brilliant insurance products not only offer a comprehensive insurance coverage to the investors but also allow the opportunity for wealth generation opportunities via investment in equity, shares or bonds. No wonder, ULIPs make for an ideal investment instrument for investors, with low-risk appetite, looking to multiply their wealth without having to jeopardize their investments.
In addition to the investment opportunities and insurance coverage, ULIPs also offer income tax benefits under section 80C of the Indian Income Tax Act. Those investing in ULIPs may avail tax exemption on the premiums paid.
Mitigation of Risk
Under ULIP plans, the money is invested in different low-risk funds. As a result, the invested money is safe against various investment-related risks. The policy is a go-to option for policyholders, with low-risk appetite, who want their funds to grow, but at the same time, don’t want to risk their investment.
ULIPs offer ultimate flexibility to investors. Investors may choose to select their life cover, change the premium amount according to their budget, and even select fund options according to their risk appetite. Here are just some of the many aspects where investors can enjoy comprehensive flexibility with ULIP plans.
► Options to Select Life cover: ULIP plans allow the flexibility to choose the quantum of insurance cover. This means policyholders can choose their life cover according to their financial capabilities.
► Option to Change Premium Amount: This is perhaps one of the best features of ULIP plans. This means after completion of a pre-stipulated time-period, policyholders can modify their premium amount. According to a policyholder’s financial capabilities, the premium amount can be increased or decreased, respectively.
► Options for Premium Top-up: Typically, most ULIP plans offer a top-up facility that allows policyholders to maximize their life cover as well as the investment for higher returns, whenever market conditions are favorable.
► Options of Additional Riders: ULIPs come packed with the option of additional rider benefits. These riders are available at a little, extra premium.
► Option to Choose Fund Options: Under ULIP plans, a part of the premium is invested in profitable and safe investment instruments including mutual funds, equity, bonds, stocks, etc. These plans allow policyholders to take their pick of fund options to invest their money. These funds may widely vary according to the risk exposure in order to help investors accomplish their financial goals.
Benefits of ULIP Plans
ULIPs come packed with a host of benefits for the investors. Here is a list of just some of the many benefits of ULIP plans.
ULIPs allow investors to earn market-linked returns as a part of the premium paid by the investors is invested in market-linked funds such as debt instruments and equity.
Insurance & Investment Benefits
ULIP plans offer the triple benefit of life cover, investment, and tax savings. This means investors get to enjoy a comprehensive life cover as per their budget and preferences and earn market-linked returns on their investment.
In addition to the investment and insurance benefits, ULIPs also offer tax exemption benefits for a maximum of Rs 1.5 lacs under Section 80C of the Income Tax Act. Furthermore, the maturity benefits are also tax exempt. However, there is a caveat. The minimum Death Benefit or the Sum Assured must be at least 10 times the yearly premium. If this condition is not fulfilled, the tax benefits are capped at 10% of the Sum Assured and Maturity Benefits are not exempt for tax.
ULIPs offer death benefits in the event of the demise of the policyholder during the term of the policy. While death benefits are offered as sum assured along with the fund value, benefits may vary depending upon the cause of death of the policyholder.
ULIP plans also offer maturity benefits if the insured survives the maturity period of the policy. Generally, maturity benefits are offered as the amount of fund value. However, some insurance providers may offer extra benefits depending on their terms and conditions.
Long-Term Investment Benefits
ULIPs make for the best investment instrument for those looking to reap maximum returns on their investment in long-term. Here it is important to remember that market fluctuations and volatility may impact the returns in the short-term. On the other hand, staying invested for a longer time makes it easy for the investors to cope-up with the volatility of the market and earn a much higher rate of return on their investment. And ULIPs allow for long-term investments making it easier for investors to make maximum returns on their investment.
Let’s face it: anyone can run into financial troubles. ULIPs come in handy in such scenarios. ULIP plans allow investors to withdraw a part of their investments in the event of an emergency, after completion of a pre-stipulated timeframe. Typically, these withdrawals are tax exempt.
How do ULIPs Work?
In a ULIP plan, one part of the premium paid towards the policy goes towards ensuring a life cover for the insured, whereas another part of the premium is invested in different types of fund options. Investors can take their pick of the fund options depending upon their risk appetite and wealth creation goals.
Insurers collect premium from ULIP policyholders and invest the collected money in the different types of funds selected by the investors, after deducting the various expenses and the insurance part of the premium.
After the accumulated money is invested, the total corpus is divided into different units with a face value assigned to them. The value assigned to these units is referred to as NAV (Net Asset Value). Then investors are assigned units depending upon the investments made by them. The decrease or increase in the value of the selected assets (under the fund option) is reflected by NAV.
At the end of the policy term or the maturity of the ULIP plan, the insurance company pays the fund value to the insured. In the event of the death of the policyholder during the term of the policy, the sum assured, fund value, or death benefit, whichever is higher, is paid to the nominee assigned by the policyholder.
Let’s take an example to understand how ULIPs work:
Let’s assume that someone pays a premium of Rs 50,000 for a ULIP plan. Now, from this premium amount, the insurance company will then deduct different charges including premium allocation charges, mortality charges, fund management charges, etc., and the amount selected as the life cover option by the policyholder.
Now let’s assume after the total deduction made towards premium allocation charges, mortality charges, etc., the premium payment made comes down to Rs.45000. This amount is invested in the fund of choice of the investors. Here it is important to know that the insurance provider invests 50 percent of the fund on behalf of the investor in the equity markets such as shares, bonds etc. The remaining 50 percent balance is invested in life insurance coverage.
Professional fund managers who work with the insurance provider manage the investment. The policyholders don’t have to track the investments.
Now, let’s say if the fund NAV is Rs 10. Then, the investors are assigned 4500 units of Rs 10 each. If the NAV increases to Rs.11, the investors are assigned 4091 units. The plan enables the policyholder to switch between the funds that allow them to make the best use of the market conditions as per their investment needs.
Why Should One Invest in ULIP?There are umpteen advantages to investing in ULIPs. Here is a little list of just some of the many benefits of investing in ULIP plans:
ULIPs have fairly lower annual charges since Insurance Regulatory and Development Authority (IRDA) has regulated the annual charges at the rate of 2 to 2.25 percent per annum for the first 10 years. A large number of people still prefer mutual funds over ULIPs. However, when it comes to ULIP vs mutual funds, the charges attracted by Unit-Linked Insurance Plans are at par with the mutual funds.
ULIPs make it easy for investors to select their investment options depending upon their risk appetite and tolerance. Investors, who want to play it safe, can opt for
debt funds and the ones with greater risk appetite can invest in equity funds.
The generous The generous lock-in period makes ULIPs the perfect long-term investment instrument with lucrative returns on the investment.
The best ULIP plans allow investors to keep a tab on their investment portfolio. Investors are updated with the percentage of invested premium along with the rates at
which charges are levied. Additionally, investors are informed about the number of fund units they hold and the total fund value of the units assigned to them.
ULIPs offer the flexibility of switching from one fund to the other, without having to spend through the nose and without having to run from pillar to post. It offers
better choices and the investors can invest according to their investment goals and the situation of the stock market.
While opting for a ULIP plan, investors are allowed to take their pick of the funds according to their risk appetite and investment goals. If an investor is looking for a higher return on investment and is willing to take risks, he/she can opt for an equity fund. On the contrary, if investors’ risk appetite is low to medium, he/she can opt for debt funds. Additionally, the investors can go for hybrid funds as per their needs.
Since ULIPs are a life insurance product, they come packed with tax benefits for investors. Depending on the type of ULIP, an investor can enjoy tax-free payout at the
time of maturity and can enjoy tax exemption on the premium paid towards the policy.
With investment benefit, additionally, the best ULIP plans provide an add-on rider for enhanced insurance coverage. Riders for critical illness, accidental death etc. take proper care of the financial needs of an insured as well as his/her family.
Types of ULIPs
There are many, different types of ULIPs and it can be broadly classified depending upon the needs and goals of the investors. Let’s explore the different types of ULIPs:
Based on Investment Purpose
Here are the four different types of Unit Linked Insurance Plans categorized based on the investment objective of the investors:
For Wealth Generation
These ULIPs are ideal for investors having an investment goal of accumulating wealth over a fixed period of time. Investors in their early thirties can benefit from this plan because they have the flexibility to fund their future goals.
For Health Benefits
These ULIP plans are ideal for investors looking forward to accumulated funds to take care of medical emergencies in the future.
For Child’s Education
These plans are ideal for supporting a child’s education. These ULIPs secure the child’s future against any unpredictable situation by accruing funds over a period of time. When required, the funds can be used to sponsor a child’s education.
These ULIP plans are ideal for creating a safety net post-retirement. These plans require an investor to pay the premium when he’s employed so that he/she can enjoy the plan benefit upon retiring.
Based on Wealth Generation
Here are the 3 different types of Unit Linked Insurance Plans categorized on the basis of wealth generation objective of the investors:
Single premium plans and regular premium plans
As investment goals vary insurance buyer per insurance buyer, so do ULIP returns. Every insurance buyer has a different premium paying capacity. Based on the buyer’s premium paying capacity, insurance providers design various Unit Linked Investment Plans. True to its name, the single premium plans come with a one-time premium payment. Regular premium plans, on the other hand, come with pre-decided payment tenure.
Guarantee plans and non-guarantee plans
Insurance providers offer guaranteed benefits and add-ons. Typically, these benefits and add-ons are for a longer period of time. While guaranteed plans safeguard the insurance buyer from any exposure to risk, the offered reward is lesser. Non-guaranteed ULIPs, on the other hand, offers a wide range of investment options ranging between various risk levels so that an insurance buyer avails his/her investment goals. The non-guaranteed ULIPs make no promise, it offers an opportunity for the insurance buyer to decide where can he/she invest his/her money and when.
Life stage based plans and non-life stage based plan
Varying the investments on the basis of risk exposure, the plans are considered to be a financial support to the insurance buyer. Life stage based plans work on the principle that priorities are dynamic and they change over a long period of time. It’s because the risk appetite is at its peak when an investor is young. As a result, the investments will be divided between debt and equity instruments in a different amount at different period of time.
Based on Death Benefit
Under the death benefit option, 2 types of ULIPs are available at the disposal of the investors:
Type 1 ULIPs
Under this plan, higher of the assured sum or the value of the fund is paid out to the nominee as a death benefit. If the policyholder dies during the initial years of the plan, and value of the fund is less than the assured sum, the insurance provider will pay for the pre-decided sum to the nominee.
Type 2 ULIPs
Under this plan, an assured sum, as well as the value of the fund, is paid out to the nominee as a death benefit. Typically, the insurance providers charge an extra premium for these plans.
Types of ULIP Funds
Here’s a list of funds where investors can invest a part of their premiums along with the risk elements associated with them:
|Fund Option||Investment Type||Risk Category|
|Equity Funds||Corporate shares, stocks, etc.||Medium-High|
|Income, Fixed Interest, and Bond Funds||Government securities, corporate bonds, etc.||Medium|
|Money Market Funds||Bank deposits, cash, etc.||Low|
|Balanced Funds||Equity and fixed interest instruments.||Medium|
In this type of fund, the investor’s moneyis put in the equity market, which is subject to comparatively higher risk.
Income, Fixed Interest, and Bond or Debt Funds
In this type of fund, the money of the investor is invested in bonds or in other debt securities. They are the medium risk funds.
Money Market Funds
In this type of fund, the money of the investor is invested in bank certificates of deposits, etc. The money in these funds is invested for short terms and hence it is the lowest risk fund.
It is sometimes also known as hybrid funds, wherein the money is invested in both – bonds and equity. These funds are of medium risk.
Best ULIP Plans in India 2018-19
|ULIP Plan||Entry Age (Min-Max)||Minimum Single Premium (Rs.)||Max Premium Allocation Charge (Rs.)||Max Policy Admin Charge (Rs.)||Free Fund Switches (Yearly)|
|HDFC Life Click2Invest||30 Days to 65 Years||24000||Nil||Nil||4|
|SBI Life eWealth||18 to 50 Years||10000||Nil||45||N.A.|
|Aviva iGrowth||18 to 50 Years||35000||0.05||0.30% (of Annualized Premium )||12|
|Bharti Axa eFuture Invest||18 to 59 Years||50000||Nil||0.005||12|
|Bajaj Allianz Fortune Gain||1 to 63 Years||50000||0.005||Rs. 10 Per Month||Unlimited|
|LIC Market Plus-I Growth Fund||18 to 65 years||30000||NIL||Rs.60 Per Month Max||4|
|MAX Life Fast Track Growth Fund||18 to 50 years||100000||2% (Single Premium) to 4% (annual premium)||Rs1,500 per Year||12|
|ICICI Pru Wealth Builder II||0 to 69 years||48,000||3% to 4%||Rs. 500 per Month||NA|
|PNB MetLife Smart Platinum||7 to 70 years||30000/60000||1.25% per Annum (Maximum)||Rs. 40 (Max)||4|
|Aegon Life iMaximise Secure Plan||7 to 55 years||36000/24000||Nil||Rs 100 per Month||4|
ULIP allows its investors to efficiently maximize their wealth and build a financial corpus to secure the future of their families. ULIPs are the great insurance product with a combo of insurance and investment in a single financial instrument. The investor, before investing, must know the best ULIP plans.
Disclaimer- This list is no order of ranking and is symbolic of the features and benefits of the best plans in India.
How to select the best ULIP plans?
There are a few things that one must keep in mind when picking the best ULIP plans from the lot. Here is a list of just some such pointers:
Analyze Personal Investment Goals
Before selecting a ULIP plan; it is a pre-requisite for every investor to analyze their long-term financial goals. It is a must to opt for a plan that is in sync with their investment goals and investment horizon.
Selecting the best ULIP becomes a cakewalk when investors are aware of the different features and benefits of ULIP plans. Investors can use ULIP calculator in order to calculate returns on Investment in order to pick the best ULIP plans.
Yet another thing that investors must keep in mind is the flexibility offered by their intended ULIP plan. Here are two things that investors must remain careful about in order to compare ULIP plans on the parameter of flexibility.
► Investment Flexibility: The plan enables the policyholders to choose the investment options even before they invest for their intended ULIP plans. On the basis of the risk tolerance and appetite of the investor, they can opt for debt, equity, or a hybrid ULIP plans.
► Policy Tenure Flexibility: Most ULIP plans are long-term; as a result, they come with a lock-in period of 3 to 5 years. Before investing, the investors must analyze their investment horizon. Depending upon their intended timeframe of the investment, they must take their pick from a variety of ULIP plans available at their disposal.
Benefits of Buying ULIPs Online
Electronic transactions have become a norm rather than an exception in the Indian insurance industry. A large number of insurance companies now aggressively sell Ulips online. However, a fair share of experts remains skeptical about buying ULIPs online. Here are some pointers to understand why it makes sense to buy ULIPs online.
Online ULIPs are cheaper as against their offline versions. This is because buying ULIPs online omits the commissions for the intermediaries and the agents making the plans more affordable for the investors.
Lower Premium Allocation Charges
Since the distribution cost is weeded out, the premium allocation charges are usually lower in the online version of ULIP plans.
Since buying ULIP plans online helps investors to get rid of the intermediary or agent commissions, more portion of your premium paid towards the plan goes towards investment, especially if the intended plan has no premium allocation charge associated with it.
Higher Fund Maturity Value
Since the lower distribution cost leads to higher investment capital, the fund maturity value is also relatively higher.
Options to Compare
Buying online also allows investors to compare different ULIP plans available in the similar category. Investors can compare these plans depending upon their risk appetite, and the various expenses related to their intended plans.
Generous Life Cover
One of the biggest benefits is that the ULIP plan offers life cover that is 10 times higher than the premium. For example, if an insured pays a premium of Rs.10, 000 on an annual basis, he/she will enjoy a life cover of Rs.1 lakh.
The premium paid for ULIP plans is a combination of different charges and fees. Here is a list of 8 essential charges of ULIP Policies:
Policy Administration Charge
These are the charges that are levied for the administration of the intended ULIP plan. Policy administration charge is usually deducted on a monthly basis.
Fund Management Charges
These charges are levied for the management and allocation of funds that offer potentially higher returns.
These charges are levied towards the insurance component of the ULIP plan. Mortality charges widely vary for investors of different age groups and are levied on a monthly basis.
Premium Allocation Charge
These charges are levied for the allocation of the premium amount towards the funds of an investors’ choice. Premium allocation charges are deducted upfront from the premium payment.
The charge is levied on the policyholders if they decide to exit the ULIP scheme, before the end of the pre-stipulated lock-in period.
Typically, charged every month, mortality charge is levied for compensating the insurer in the event of the demise of the insured during the term of the policy. These charges vary on the basis of age and lifestyle of the policyholders.
Surrender charges are levied at the time of premature withdrawal of ULIPs by the insured.
Fund Switching Charges
Some of the best ULIP plans come packed with the flexibility for policyholders to select the fund option of their choice and make a switch between their chosen funds. It is a fee that is charged for switching between the funds.
What is ULIP NAV?
The full form of NAV is Net Asset Value. The NAV is basically ULIP scheme’s price per unit. When one pays premium for a ULIP, he/she is actually purchasing individual units of a particular scheme. Therefore, the price per unit of a Unit Linked Insurance Plan is known as the Net Asset Value.
As discussed already, ULIPs leaves policyholders spoilt for choices when it comes to offering rider benefits. Here is a list of just some of the many rider options available under ULIP plans:
One of the most sought-after and best-selling available riders available under ULIPs, Term Rider either offers a one-time, lump-sum payout or a regular monthly income to the nominee of the policy in the event of the death of the insured during the term of the plan. This rider benefit is apt for those who are the sole breadwinners. With this rider, such policyholders can secure the financial future of their loved ones, even when they aren’t around. Under the term rider, a pre-decided amount is provided to the policyholders so that their dependents are financially secured and have a regular income to support their basic needs and necessities.
Critical Illness Rider
Critical Illness Rider is yet another brilliant rider option available under ULIP plans. This amazing rider comes loaded with a host of benefits for policyholders. It offers coverage for a long list of critical illnesses such as cancer, paralysis, kidney failure, heart attack, coronary artery bypass, etc. Here it is important to remember that treatment of these diseases are expensive and can easily financially cripple anyone. This is where the Critical Illness Rider comes to the rescue of the policyholders. It provides policyholders with a one-time payment benefit upon the diagnosis of one of the listed critical illnesses so that they don’t have to face any financial crisis.
Permanent Disability and Accidental Death Rider
A staple component of most ULIP plans, Permanent Disability and Accidental Death Rider option offers insurance coverage to the nominee of the policy in the event of accidental death of the insured during the term of the policy. the Under this benefit, the insurer offers a basic sum assured along with the rider benefit to the nominee of the policy.Typically, it provides additional coverage to the insured’s dependents. In the event of permanent disability caused due to an accident, the rider offers pre-decided benefits to the insured. Permanent disability, under this rider, includes but is not limited to, the loss of legs, loss of hands, or both.
New Age ULIPs
Over the years, ULIPs have undergone extensive updations, changes, and modifications. In fact, the new-age ULIPs are completely different from the traditional ULIP plans. Cutting-edge technology, digital solutions, and innovative ideas have made helped reduce many charges that made traditional ULIPs costlier. In addition, the new-age ULIPs are easily available at the disposal of the investors and can be bought online ridding the commission for intermediaries and agents. Given the veer-so-increasing popularity of new-age ULIPs, it wouldn’t be an exaggeration to say that investors have finally an investment instrument that’s safe, convenient and affordable.
It has become easier than ever to compare ULIP plans by logging on to one of the many insurance aggregator websites before finally zeroing in on a plan. One can easily use the ULIP calculator in order to compute the returns on the investment.
Benefits of New Age ULIPs
New-age ULIPs come packed with a host of benefits and advantages for the policyholders. These plans feature more benefits as compared to the traditional ULIP plans. Here is a list of just some of the many benefits of the new-age ULIPs that make them sell like hot cakes
An investor can claim tax deductions as per Section 80C of the IT Act 1961 for the premium paid for the new-age ULIPs. The payout received at the time of maturity and the gains made under the plan are also tax-free as per Section 10 (10D) of the IT Act 1961. In the event of the demise of the policyholder during the term of the plan, the death benefit paid to the nominee is also tax-exempted.
Traditional ULIPs had a lock-in period of three years, which meant that policyholders could not redeem their investment and benefits before that period. In case policyholders chose to redeem the benefits before the end of the lock-in period, there was a steep penalty levied on the policyholders. New-age ULIP plans come packed with a lock-in period of 5 years. It encourages investors to aim for goal-oriented investment and helps them safeguard their long-term investment goals.
Since the investment amount is locked-in for 5 years, the power of compounding and rupee cost averaging help investors make sure that their wealth grows quickly and manifolds.
Better Returns on Investment
With technological advancements and regulatory intervention, there has been a dramatic decrease in the charges levied on the investors. This helps investors make sure that a large part of their premium goes towards investment. In addition, the longer lock-in period of the new-age ULIPs helps investors gain maximum returns on their investment. In some cases, these new-age ULIP plans can help investors get double-digit returns on their investment.
New-age ULIP plans come with a test period of 15-days. The policyholders can opt to exit the policy within this timeframe if they aren’t happy with the plan or they do not agree with the terms and conditions of the policy. The timeframe of 15 days is known as the free-look period.
In addition, as per the rules and provisions of IRDAI, insurers are now mandated to inform the investors about the potential charges and fees that the new-age ULIP plans would attract. These charges include everything, right from Policy Administration Charges to Fund Management Charges. These charges are mentioned in the terms and conditions of the plan.
Furthermore, policyholders can monitor the performance of their investments made under the ULIP policies. Insurance companies are mandated to update the Net Asset Value of funds on a daily basis. Please be advised that the Net Asset Value is the buying and selling price of the funds. Since NAV is regularly updated and is public knowledge, policyholders can know whether their investments are performing well or not.
One of the biggest benefits of new-age ULIps is the fact these plans offer flexibility to the investors. Here are some of the many ways the new-age ULIPs offer flexibility to the investors:
► Policyholders can opt for investment avenues of their choice such as debt funds, equity funds, or balanced fund according to their risk appetite and tolerance.
► The plan enables investors to move their investment from funds of their choice anytime during the tenure of the policy.
► The investor is allowed to change the premium amount. In case, investors wish to increase or decrease their premium payment during the term of the plan, they may do so.
► New-age ULIP policies come packed with a host of rider options. Some such riders are accidental death benefit, critical illness, and permanent disability riders.
ULIP vs Mutual Funds
|Point of Difference||ULIPs||Mutual Funds|
|Scope||Investment + Insurance||Investment|
|Tax Exemption||On Premium payment u/s 80C||Only on Equity-Linked Saving Scheme|
|Liquidity||Fund Withdrawl not available for 1-3 years||Fund withdrawal available in 1 year (1% exit load deducted)|
|Fund Management Charges||1.35% approx.||2.5% approx.|
|Tax Expemtion||on premium ((U/S 80C)||on tax-saving funds (U/S 80C)|
|Tax on Maturity Benefits||Exempt (U/S 10(10D)||Taxable|
|LTCG||10% for over 1Lakh||No LTCG Tax|
There are still a large number of investors who prefer investing their money in mutual funds and not ULIPs. According to the latest report issued by Securities and Exchange Board of India (SEBI), 6.5 crore investors had invested in Mutual fund schemes by the end of November 2017.
Over the years, experts and investors have been debating on the benefits of ULIPs vs mutual funds. And the ULIPs vs. mutual funds debate was further blustered by the Budget 2018 that re-introduced the Long-Term Capital Gains Tax (LTCG) on equity-based mutual funds.
Clearly, ULIPs win over mutual funds hands down. The insurance, investment and tax savings element of the ULIPs make them better than Mutual Funds. The USP of ULIP policies is its low and transparent charges.
Until the year 2010, ULIPs came with higher charges. Thanks to the changes made by IRDA after the year 2010, various charges such as premium allocation charges, fund management charges, mortality charges, etc. were drastically reduced. The much-appreciated change in the cost structure has labeled ULIP policies as better investment instrument than mutual funds.
ULIPs vs SIPs
|Point of Difference||ULIPs||SIP|
|Investment Type||Investment + Life Insurance||Investment|
|Investment Mix||Equity Market + Debt Market||Equity Market|
|Tax Benefits||All ULIP plans||Only with ELSS|
|Switching Option Available||Yes||No|
|Lock-in Period||5 Years||3 Years|
|Fund Management Charges||1.35%||2.50%|
Yet another debate that has long caught the attention of Indian investors is ULIP vs. SIP. Both these investment instruments are immensely popular and sought-after amongst investors. Unit-linked insurance plans and SIPs are both disciplined investment options that offer opportunities for wealth creation in a pre-stipulated period of time.
When it comes to ULIPs vs. SIP, Unit-linked insurance plans remain the clear winner. Here are some important points that make ULIP plans the best investment option.
Insurance + Investment
The basic difference between SIP and ULIP is that the latter specifically offers insurance cover. SIP through mutual fund doesn’t offer life cover. When an investor opts for a ULIP, a part of the investment amount goes into the pool of investment just like MF. The insurance provider collects the money invested by all the investors and invests a portion of the money it in different fund options so that the money can generate higher returns on investment. Then, the insurance company invests the remaining amount of money in insurance cover.
While Equity Linked Saving Scheme is the one and only mutual fund that comes with the benefit of tax-saving, investing in ULIPs up to Rs 1.5 Lakh one can avail the benefit of tax-saving as per Section 80C of the IT Act, 1961.
Lower Fund Management Charges
Mutual funds attract a higher fund management charge at the rate of 2.5 percent or more. Apart from FMC, there are a plenty of other charges like entry load, recurring charges, and exit load. ULIPs on the other hand, attract fund management charge at the rate of 1.35 percent.
Mutual funds being a pure investment instrument are exposed to a higher risk. They attract a higher risk in order to generate a higher return on investment. Contrary to that, ULIPs are typical insurance products. The fund managers avoid investment strategies that attract high-risk to diminish the potential negative impact of the invested capital.
ULIP plans have passed the test of time by making the necessary modifications and emerged as an all-rounder investment product.
Long-Term Capital Gains Tax on ULIP Policies
What is Long-Term Capital Gains Tax?
Long-term capital gains are the profit that an investor earns after holding shares for investment for more than a year. When long-term capital gain exceeds more than Rs. 1 Lakh for more than a year it is taxed at 10 percent. If the investor gains lower than Rs. 1 Lakh, he is free from the clutches of tax. Back in the year 2004, LTCG tax ceased to exist and it was replaced by Securities Transaction Tax (STT). While STT continues to exist, LTCG tax has been re-introduced.
At the time of trading direct equity shares, STT at the rate of 0.1 percent will be levied. At the time of selling mutual fund units, it will be levied at the rate of 0.001 percent.
LTCG Tax on ULIP Policies
As per the latest tax-regime, LTCG is re-introduced with effect from 1st April 2018. This tax shall be applicable to gains earned more than Rs. 1 Lakh in the FY 2018-19. For instance, if an investor sold shares and his/her long-term gains were Rs. 1,50,000, the LTCG tax shall be applicable only on Rs. 50,000 (1,50,000- 1,00,000).
After the introduction of the latest tax regime, the plan turned out to be a better investment option. The investors are seeking an investment option that enables them to earn high returns without any tax implication. There is no tax levied on LTCG earned by ULIPs.
ULIPs and Free Switches
For the last few years, the performance of the equity market has been really favorable and conducive for investors. And experts believe that it is not going to fade away anytime soon. ULIP plans offer a profitable way of investing in the equity market.
ULIPs offer an investment and protection platform managed by professional fund managers. Additionally, these plans also offer an opportunity to enter the growing equity market. Apart from equity, investing in debt instruments also makes Unit-Linked Insurance Plans the best investment option for investors aiming at a long-term investment horizon.
Unit-Linked Insurance Plans come with a wide variety of fund options that come with different asset allocations that meet the requirements of policyholders with different risk appetite. While leaving the fund management to experts may be the best option, some customers are tech-savvy and like to monitor the fund movement on their own. ULIPs offer several options to customers in order to provide complete access to invest their premiums in a well-established suite of investment funds from Insurance companies, ranging from 100% debt to 100% equity.
Unit-Linked Insurance Plan and First-time investors
In the last couple of years, investors have gained access to lucrative investment avenues. All thanks to the new-age Unit-Linked Insurance Plans. No wonder, new-age ULIPs have quickly become popular and sought-after investment instrument.
A large majority of first-time investors are now opting to invest their hard-earned money in market-linked investment instruments such as Unit-Linked Insurance Plans. In addition, IRDAI’s intervention has made ULIPs a lucrative and transparent investment instrument for investors. Furthermore, IRDAI has also reduced several charges such as administration charges, premium allocation charges, fund management charges, and surrender charges under ULIPs making it more affordable for investors.
In fact, investors who start young can accomplish the goal of wealth generation by investing in ULIP plans.
ULIPs Eligibility Criteria
The Policyholder must be able to pay the policy premium as per the opted plan and premium payment frequency.
The policyholder must fulfill the criteria for entry age that varies as per insurance provider and the type of opted policy.
The policyholder can’t extend the plan above the maximum age as per the plan. In order to exit the plan, the policyholder must be below the maximum age of entry as mentioned in the plan.
Documents Required for ULIPs
Proof of Age
Documents such as AADHAAR card, driving license, passport, voting card etc. can be used as a proof of age.
Proof of Address
Documents such as AADHAAR card, driving license, passport, and voting I-card etc. can be used as a proof of address.
Proof of Identity
Documents such as AADHAAR card, PAN card, voting card etc. can be used as a proof of identity.
Proof of Income
Documents such as salary slips, bank account statement, income tax returns, etc. can be used as a proof of income.
5 ULIP Investment-Related Myths
While ULIPs are one of the best investment options in India, they are also the most confused and misunderstood investment products. This is because of the many myths floating in the market about ULIPs. These myths regularly demotivate investors to invest in ULIP plans. And that’s why it makes sense for investors to clarify all ULIP related myths and doubts before investing in the plan of their choice.
Listed below are 5 myths related to Unit-Linked Insurance Plans.
Myth 1: ULIPs are expensive and they don’t offer liquidity in financial emergencies.
Fact- A large number of people believe that ULIPs are costly. However, this is not true. All the charges levied in a ULIP plan are distributed over the term of first 5 investment years. This makes ULIPs affordable for investors. In addition, ULIPs offer complete transparency and flexibility to the investors. As far as liquidity in the event of a financial emergency is concerned, investors can always withdraw the accumulated funds partially or fully, after the completion of the minimum lock-in period. Typically, the lock-in period for ULIPs is 5 years.
Myth 2: Unit-Linked Insurance Plans don’t offer any investment opportunity.
Fact- This is yet another myth that plagues the world of investment. However, this is also not true. ULIPs are essentially hybrid insurance products that offer opportunities for investment in addition to a comprehensive life cover.
In fact, investors can take their pick of investment depending upon their risk appetite. There are various options such as small-cap funds, mid-cap funds, and large-cap funds. Additionally, there is a combination of these funds as well that offers an investment opportunity. As per his/her choice of investment option, an investor can invest in market funds, bonds, equity funds and debt funds.
ULIPs offer flexibility for changing the assured sum, premium payment tenure, premium payment periodicity. The plan can be customized as per the investment needs of the investor. In order to do so, he/she can avail the facility of availing add-on riders.
Myth 3: Unit-Linked Insurance Plans come with a lock-in of 3 years.
Fact- This is yet another myth around ULIPs. Earlier the minimum lock-in period of ULIPs was 3 years. However, after the intervention of IRDAI, the minimum lock-in period of ULIPs was changed to 5 years in 2010. 5 year lock-in period of ULIPs makes it a better product for those looking to invest their hard-earned money for a longer timeframe in order to ensure greater returns on their investment.
Myth 4: ULIPs come with high switching charges.
Fact– This is also one of the most common myths around ULIPs. The switching benefit can be availed at zero charges up to the permissible limit. Generally, insurance providers offer as high as 24 free switches on an annual basis. Before opting for a ULIP plan, investors must check the number of free switches provided by the plan. More switches mean higher flexibility.
Myth 5: ULIPs attract various charges and the actual money invested is awfully low.
Fact– Traditional ULIPs attracted many charges, which made them costly investment instrument. In addition, the higher charges made the return on Investment lower. However, since the intervention of IRDAI, the charges under ULIPs have been dramatically reduced making them a lucrative and cost-effective investment option. In fact, new-age ULIPs invest a larger part of the premium in the fund option from the 1st year onwards.
What is ULIP?
Unit Linked Insurance Plan is more commonly known as ULIP. It is a market-linked product that offers the benefits of both investment and insurance in one comprehensive plan. It is a plan that is linked with the capital market and hence it offers the flexibility of investing in equity or debt-based schemes as per investor’s risk appetite.
Explain the sum assured with the context of ULIP
In ULIP sum assured is the minimum amount provided under death benefit which the nominee of the insured receives in the event of the death of the policyholder within the policy term.
What is ULIP NAV?
NAV or Net Asset Value of ULIP is the total amount of its holdings including the admissible expenses. It is calculated by adding the holding of ULIP on a specific day and by deducting all liabilities such as management fees, operating expenses, marketing expenses, and other permissible charges and expenses.
What tax benefits are offered in ULIP?
The money invested in ULIP is eligible to get tax benefits as well as the maturity amount. The money that one invests in ULIP can be claimed as tax deduction Section 80CCC (pension) and 80C (life insurance). The maximum tax deduction that one can avail under Section 80CCC and 80C is Rs.1, 50, 000. One can invest higher amounts, but the deduction is limited to Rs.1, 50, 000.
What is the meaning of maturity benefit in the context of ULIP?
The total amount that one gets upon maturity of his/her ULIP is known as Maturity Benefit. The maturity benefit depends on the fund values that one chooses to invest in.
Is it possible to take a loan against ULIP?
Previously it was possible to take a loan against ULIP, but as per the new guidelines of IRDAI, this rule is not valid anymore. However, ULIPs give an option of partial withdrawal, so a policyholder can withdraw a part of his/her ULIP investment without taking any loan.
Is it possible to track the fund value?
To know the total fund value, one has to keep track of the Net Asset Value of his/her funds. The NAV calculated every day as per the changes in the market. Most of the insurance providers publish updates related to these values on a regular basis.
Is it possible to surrender ULIP?
Yes, one can surrender his/her ULIP after completing the five years of lock-in period and by paying the Surrender Value. However, it is good to continue with the ULIP policy because in the initial years the policy may not give higher returns because of the Allocation Charges.
How are the death benefits of ULIPs calculated?
As per the highest amount of the Sum Assured, Fund Value, or paid premiums’ percentage, the nominee is offered the Death Benefit in case of policyholder’s death during the policy tenure.
What are the different riders of ULIP?
The riders are the additional benefits that a ULIP insured can add in his/her plan to enhance its benefits. Some of the common riders provided by most of the ULIP providers are:
- Income Benefit Rider: In this rider, a monthly death benefit upon the death of the policyholder, which most of the times is equal to 1% of the rider sum assured. This benefit is paid for a specific period, which is mentioned in the policy document.
- Premium Waiver Rider: In this rider, all the premiums that are payable under the policy are waived off. This is possible only when the policyholder becomes unable to pay the premiums because of the occurrence of some unexpected events such as death, diagnosis of any critical illness, or permanent total disability incurred due to an accident.
- Accidental Death Benefit Rider: In the occurrence of death because of an accident, this rider is paid. This benefit is paid above and over the standard benefits paid for ULIP. However, the reason for the death of an individual must be because of the accident and must be in a specified timeframe of the date of the accident.
- Critical Illness Rider: Upon diagnosis of any kind of critical illness that is specified in the policy document, a lump sum benefit is given to the policyholder. However, the type and number of alignments covered may vary from plan to plan.
Specify the difference between maturity benefit and death benefit?
Most of the ULIPs provide two benefits – Maturity Benefits and Death Benefits. Maturity benefits are provided by the insurance company when the policyholder outlives the term of the policy and policy completes its tenure. However, to get this benefit, the policyholder has to ensure that all the premiums are given on time. Once the policy reaches its maturity, the insured gets the fund value as well as the loyalty benefits, if there are any.
On the other hand, the death benefits are given to the nominee when the policyholder dies during the policy term. The nominee gets any of the mentioned benefits as a death benefit – 1) Fund value or sum assured, 2) sum assured, whichever is high 3) Fund value and sum assured according to policy’s terms. The proceeds got in case of policy’s maturity or upon the death of the policyholder are free of tax according to Section 10D of the Income Tax Act.
What is the lock-in period in ULIP?
A lock-in period is the time period during which a policyholder cannot make any withdrawals or liquidate his/her ULIP. However, if one wants to discontinue his/her ULIP during its lock-in period, then the insurance provider moves the fund value to discontinued fund after applying charges of surrender to it. The funds are paid back only after completion of the lock-in period. The Insurance Regulatory and Development Authority of India has risen the lock-in period of the ULIPs from 3 years to 5 years on 2010 September. This was done to make ULIP a long term investment option.
Is it possible to withdraw the investments from ULIP?
The biggest perk that one gets with ULIP is the particle withdrawal option. ULIPs provide its policyholders a facility of partial withdrawals from his/her accumulated value of fund before the term of the policy ends. This option can only be availed after completion of the lock-in period. There is no specific rule for the amount of withdrawal in partial withdrawal option, as every insurance provider has its own set of rules for the same. However, it is prohibited to withdraw the entire amount from the ULIP without surrendering the plan.
What tax benefits one gets by investing in ULIPs?
ULIP has become one of the favorite investment options for investors because of its tax benefits. One can claim a tax deduction on the premiums that he/she has paid under Section 80C. The maximum amount that one can claim in Section 80C is Rs.1.5Lakhs. On the other hands, the maturity benefits that one gets in ULIPs are also tax-free under Section 10D of the Income Tax Act with a condition wherein the annual premium that is paid is less than 10% of the policy’s sum assured. Moreover, the death benefits paid to the beneficiary of the insured also are tax-free.