Unit Link Insurance Plan ( ULIP )

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A Unit Link Insurance Plan (ULIP) is an investment product that helps the investor claim an 80C deduction.

The two main pillars of wealth management is  having an

  • Insurance (medical and term both) whereas
  • Investing in equities.

To get a mix of both of these characteristics of financial planning,  ULIP is one of the suitable options. In ULIP investment, a small portion of money is invested towards securing your life and rest is invested in equities. Lets learn more about ULIPs in detail.

Latest Update

Union Budget 2021 Outcome:
Budget 2021 amended to bring the maturity proceeds of ULIPs with an annual premium of more than Rs 2.5 lakh, to be taxable on par with equity-linked mutual fund schemes. this will be applicable to new ULIP policies availed on or after Feb. 1, 2021.

What is fund value in ULIP?

Every policyholder has the option to choose from a number of funds, to invest in, based on their risk profile and market conditions. The total monetary worth of the units owned by the policyholder is termed as the fund value. You can calculate the fund value on a particular day by multiplying the net asset value (NAV) of each unit on that particular day by the number of units held by the policyholder. The fund value can vary based on the NAV.

What is the sum assured in ULIP?

The sum assured for ULIP is the minimum guaranteed amount offered by ULIP to the nominee in the case of the policyholder’s death.

How to surrender an HDFC ULIP policy?

In order to surrender an HDFC ULIP policy, you will have to submit the following documents at the nearest HDFC Life Insurance branch or any of its associates:

  • Duly filled surrender form
  • Original policy documents
  • Cancelled cheque with the policyholder’s name/account number printed on it
  • ID proof
  • Contact details
  • While ULIP is a combination of investment and insurance products, mutual funds is purely an investment product.
  • ULIP has a lock-in period of five years whereas mutual funds can be withdrawn at any time.
  • Switching between funds can be done without having to pay any taxes in the case of ULIPs. In the case of mutual funds, you are allowed to switch between schemes of the same fund house. However, such switching will be considered as a redemption and the resulting capital gains are taxable.
  • Charges applicable to ULIPs are mortality charges, premium allocation charges, fund management charges, and administration charges. When it comes to mutual funds, entry load is not applicable. But annual fund management charges and exit load may be applicable.

Both ULIP and National Savings Certificate (NSC) provides tax benefit u/s 80C of the Income Tax Act, 1961. Investments made in ULIPs of up to Rs.1.5 lakh are eligible for tax deduction under the overall limit offered under Section 80C.

On the other hand, the investments made under NSC also gets tax deduction under the overall limit of Section 80C. Further, the interest earned on the NSC investment is not paid out regularly but is reinvested to the account. The reinvested interest amount is therefore considered as fresh investment and qualifies for a fresh deduction under Section 80C. Only the final year’s interest will not receive any tax deduction, as it does not get reinvested.

The disadvantage or demerit of ULIPs is that they are not transparent regarding where the capital is invested and what share of this capital is utilised for commissions and expenses.

How to cancel/stop a ULIP policy?

You can cancel the ULIP policy by initiating a surrender request with your insurer. Some charges will be applied upon surrender of the ULIP policy. Upon surrendering the policy, the surrender value will be offered to you as per the fund value on the date of surrender. However, this amount will be paid to you only after completing the lock-in period of five years of your policy. Though it is possible to cancel the policy during the policy term, experts advise that you stay invested for a minimum of 10 years to receive maximum benefits.

Investing in ulip plans exempts a maximum up to what limit for income tax?

You can get income tax deduction up to the overall limit of Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961

All ULIP pension plans have to give how much percentage as guaranteed returns?

If you happen to surrender the policy, the policyholder will only get one-third of the surrender value. That is a minimum of 30% of the premium paid less survival benefits already paid if surrendered during the second year or later.

On the other hand, ULIP products do not provide guaranteed maturity returns.

What is the LIC ULIP policy?

Life Insurance Corporation (LIC), a public sector insurance company in India, offers three ULIP products. The products are:

  • Nivesh Plus
  • SIIP
  • New Endowment Plus

How to maximise ULIP returns?

Here are a few tips to maximise your ULIP investment returns:

  • Utilise the switching option: You can use the switching and premium redirection facility offered for ULIP to get maximum returns. Move money into debt funds when the markets are climbing and into equities when the markets are down. Implementing this strategy for 2 to 3 times during your investment horizon of 20 years will help in achieving your goals better. When you are approaching the maturity period, you can move to balanced funds.
  • Stay invested for a long time: Though the lock-in period for ULIP products is five years, it is recommended that you stay invested for a longer period of time. The power of compounding works the best when you stay invested for a period of 10-15 years. That is the interest will be reinvested as a principal amount to help you get maximum returns.
  • Avail tax benefit on equity investment: You can get EEE tax benefits upon investing in ULIPs. That is income tax exemption is available on the capital investment, interest earned, and the maturity benefit.

A policyholder pays an identical premium amount for ULIP and EPF. Where does he get the max tax efficiency?

As stated, if a policyholder pays an identical premium amount towards ULIP and EPF, he can get the maximum tax efficiency and tax benefits on ULIP. This is because ULIP provides EEE tax benefits. However, this is not the case with EPF. The interest earned on EPF and the maturity benefits may be taxable even if the contributions are tax exempt.

What is a unit in ULIP?

An insurer pools money from the policyholders in the form of premiums and invests the sum in the funds chosen by them. Once the money is invested, the total invested corpus is divided into ‘units’ with a certain face value to each such unit. Further, each investor is allocated ‘units’ with respect to the amount invested by each of them. The value of each unit, at any point in time, is called the Net Asset Value (NAV).

What are mortality charges in ULIP?

The insurer levies mortality charges to every ULIP policy holder for insurance protection upon the policyholder’s death and to cover any other expenses. This charge is deducted before investing the policyholder’s money.

In other words, a mortality charge is the sum at risk or the sum assured minus the fund value.

What is the premium allocation charge in an ULIP?

A premium allocation charge in an ULIP is the percentage of the first-year premium as charged by the insurer before allocating the policy. This can be seen as one of the initial expenses charged by the insurer at the time of policy issuance. It covers the expenses, such as the cost of underwriting, agent’s commission if any, medical expenses, and others.

What is the difference between ULIP and ELSS?

Here are the key differences between Unit Linked Insurance Plan (ULIP) and Equity Linked Savings Scheme (ELSS):

  • ULIP has a mandatory lock-in period of five years, while ELSS has a lock-in period of three years.
  • The returns from ULIP can vary based on the funds chosen by the investor. When it comes to ELSS, the returns can approximately range from 12% to 14%. However, they are subject to market variations.
  • You can claim income tax deductions on the amount invested u/s 80C of the Income Tax Act in the case of ULIP. But the gains are taxable. Whereas, long-term capital gains arising from ELSS is taxed at 10% beyond Rs.10 lakh.
  • In the case of ULIP, charges, such as policy administration charges, premium allocation charges, and mortality charges are applicable. For ELSS, only exit load and fund management charges are applicable.

How to track ULIP performance?

Here are two ways to track ULIP performance:

  1. Absolute returns: If you wish to calculate the absolute returns on ULIP, you will need the current NAV and the initial NAV of the scheme. This method can be used to figure out the ULIP performance if it is held for a short period of time.

    Absolute Returns = [(Current NAV – Initial NAV)/Initial NAV]*100

  2. Compounded Annual Growth Rate (CAGR): This is the measure of the annual growth of an investment over a specific period of time. Here is the formula for the same:

    CAGR = {[(Current NAV/Initial NAV)^(1/Number of Years)] – 1}*100

How to buy a ULIP?

ULIP products are offered by many insurance companies. Therefore, list out the ULIP products offered by various vendors while you research on the ULIP products. Choose a ULIP product that suits your needs once you understand the features of the life cover and the investment funds of the listed ULIP products. Contact the insurance provider of the chosen ULIP product online or visit the insurer’s branch office to buy the ULIP product. A representative will guide you through the process.

What is fund switching in ULIP?

Fund switching is an option available to ULIP policyholders to move their investments from one fund to another within the same plan. The fund switching facility allows you to fully or partially transfer units among equity, debt, and equity to debt funds.

ULIP is covered under which section?

Any investments made in ULIP gets income tax deduction under Section 80C of the Income Tax Act, 1961.

Which ULIP plan is best?

There are many ULIP products available in the market. You can consider the following factors to conclude on the best ULIP product to invest in:

  • Total Cost of ULIP Investment: A number of different charges, such as mortality charges, premium allocation charges, fund management fees, policy charges, surrender charges, and others, are applicable when you sign up for a ULIP product. Since all these fees and charges are adjusted against returns, it is recommended that you pick a ULIP with low cost.
  • Fund Options and Returns: ULIPs come with three different fund options—equity, debt, and balanced funds. Each of these fund options come with a different returns structure. It is necessary for you to check about the kind of fund beneath your ULIP choice and the kind of returns they offer. This must be worked out well before paying the premiums.
  • Loyalty Bonus: Some ULIPs reward you with additional units subject to certain conditions. Such bonuses can widen your returns if you stay invested for a long term. Pick and choose the ULIPs that offer loyalty bonus and other such benefits.
  • Switching Options: Some ULIP products provide an option to switch up to four times. Some other ULIP products provide unlimited switching options. Since switching provides a greater scope to investors to analyse the performance of the current funds and move their investment to a better-performing fund, keep an eye for this feature.
  • Premium Payment: There may be different premium payment options as well as flexibility in the payment frequency. Check if the ULIP you have selected provides flexibility in premium payments that align well with your finances.

What is absolute return in ULIP?

Absolute return refers to the returns you get from an asset over a specific period of time. It is denoted in percentage and shows whether the returns are appreciated or depreciated. You can calculate the absolute returns for your ULIP investment by considering two values—current NAV and initial NAV of the ULIP scheme you have invested in.

Absolute Returns = [(Current NAV – Initial NAV)/Initial NAV]*100

When was ULIPs introduced in india?

ULIPs were first introduced in India by Unit Trust of India (UTI) in 1971. Life Insurance Corporation of India (LIC), then, introduced more ULIP products in 1989.

Which organisations issue ULIP?

Generally, public and private sector insurance providers, which either operate solo or have partnered with foreign insurance companies, offer ULIP products to their customers. Offering ULIP products requires the approval of both the Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (IRDAI).

ULIP or PLI? Which is better?

Parameter Unit Linked Insurance Plan (ULIP) Postal Life Insurance (PLI)
Purpose Investment and Insurance Purely Insurance
Eligible People Employees of:
  • Central and State Governments (even contract employees)
  • Defence and ParaMilitary Forces
  • Local and Autonomous Bodies
  • RBI
  • Financial Institutions
  • Public Sector Undertakings
  • Nationalised Banks
  • Scheduled Commercial Banks
  • Postal Department
  • Government-aided Educational Institutions
  • Deemed Universities
  • Credit Co-operative Societies and Co-operative Societies registered with the government
No such eligibility criteria is applicable
Lock-in Period 5 years 3 years
Switching Option You are allowed to switch between funds as defined by the policy Not allowed to change funds as the insurance company takes the call on this
Tax Benefits EEE benefits—investment, interest earned, and maturity amount Available on invested amount u/s 80C of the Income Tax Act

Here is the formula to calculate NAV of ULIP:

NAV = [(Value of Current Assets + Market Value of Investments Held) – (Value of Current Liabilities & Provisions)]/Total number of outstanding units on date

What is the minimum lock in period for ULIP?

ULIP products come with a lock-in period of five years.