1. What is ULIPUnit Linked Insurance Plan (ULIP) is a mix of insurance along with investment. From a ULIP, the goal is to provide wealth creation along with life cover where the insurance company puts a portion of your investment towards life insurance and rest into a fund that is based on equity or debt or both and matches with your long-term goals. These goals could be retirement planning, children’s education or another important event you may wish to save for.
2. How does ULIP work?When you make an investment in ULIP, the insurance company invests part of the premium in shares/bonds etc., and the balance amount is utilized in providing an insurance cover. There are fund managers in the insurance companies who manage the investments and therefore the investor is spared the hassle of tracking the investments. ULIPS allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of the market’s performance. Benefits like these which offer investors the flexibility of switching is a huge factor contributing to the popularity of these investment instruments.
3. Lock-in-period of ULIPOne of the changes brought about by the Insurance Regulatory and Development Authority of India (IRDAI) in the year 2010 as regards ULIPs, was to increase the lock in a period from 3 years to 5 years. However, insurance being a long-term product, as an investor you may not really reap the benefits of the policy unless you hold it for the entire term of the policy which can range from 10 to 15 years.
4.Why you should invest in ULIPs?
- Life cover: First and foremost, with ULIPs you get a life cover coupled with investment. It offers security that a taxpayer’s family can fall back on in case of emergencies like the untimely death of the taxpayer, etc.
- Income tax benefits: Not many are aware that the premium paid towards a ULIP is eligible for a tax deduction under Section 80C. Additionally, the returns out of the policy on maturity are exempt from income tax under Section 10(10D) of the Income-tax Act. This is a dual benefit that you can claim with this policy.
- Finance Long Term Goals: If you have long-term goals like buying a house, a new car, marriage, etc., then ULIP is a good investment option because the money gets compounded. As a result, the net returns are generally more. This stands true even if you want to exit after the 5 year lock-in period in comparison to not having invested the amount at all and retaining it in a savings account or in the form of an FD. But, under ULIP, the mantra is to always keep the policy going for a longer time horizon to reap the best out of it.
- The flexibility of a portfolio switch: As already mentioned, ULIPS are usually designed in a way that they allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of how the market is performing. Insurance companies, on the other hand, allow a very few numbers of switches free of cost.
5. Things to consider as an investorFollowing are some important factors you should weigh in before investing in ULIPs:
- Personal financial goals: If your financial goal is about wealth creation and you want to save money for retirement, ULIP is one of the best options available.
- Compare ULIP offerings: Once you have determined your financial goal and the type of ULIP that will help you achieve it, the next step would be to compare the ULIP offerings in the market. Look for a comparison in the form of background expenses, premium payments, ULIP performance, etc. Also, investigate the nature of funds that the ULIP invests in to ascertain the returns from investments in the particular ULIP.
- Risk factor: Since ULIP investment is not as diversified as compared to ELSS, the risk in ULIP is probably a bit high compared to schemes like ELSS.
- Investment horizon:ULIPs have a lock-in period of 5 years. If a ULIP is surrendered in the first three years, the insurance cover would cease immediately. However, the surrender value can be paid only after three years.
6. Types of ULIPsULIPs are categorized based on the following broad parameters:
a. Funds that ULIPs invest ini. Equity Funds: Where the premium paid is invested in the equity market and thereby is subject to higher risk. ii. Balanced funds: Where the premium paid is balanced between the debt and the equity market to minimise the risk for investors. iii. Debt Funds: Where the premium is invested in debt instruments which carry a lower risk but in turn also offer a lower return.
b. End use of Fundsi. Retirement Planning: For those of you who plan to invest for the retirement days while you are still employed. ii. Child Education:You can iYou can invest with a long-term goal of saving to fund your child’s education or save for some unforeseen circumstances. iii. Wealth Creation:You can make investments to build a heavy corpus that you can utilize for a future financial goal
c. Death benefit to Policy Holdersi. Type I ULIP: This pays higher of the assured sum value or the fund value to the nominee in case of death of the policyholder. ii. Type II ULIP: This pays the assured sum value, plus the fund value to the nominee in case of the death of the policyholder.
7. ULIPs Vs Mutual FundsHere is a comparison between the two:
|Nature||Investment cum insurance product||Pure Investment product|
|Withdrawal||Only after lock-in-period of 5 years||Can be withdrawn anytime|
|Switching||Alternating between funds is permitted and not subject to taxation.||Switching is permitted between schemes of the same fund house. However, it’s treated as a redemption and the resulting capital gains are taxable.|
|Charges||Mortality charges, premium allocation charge, fund management charge and administration charges||No entry load, the annual fund management charges apply and an exit load, if applicable.|
7.ELSS vs ULIP – Comparative Analysis
ULIP (Unit Linked Insurance Plan)
ELSS (Equity Linked Savings Scheme)
|Lock-in period||ULIPs have a mandatory lock-in of 5 years||ELSS have a mandatory lock-in of 3 years|
|Returns||The returns can vary because an investor can choose any combination of equity, debt, hybrid funds in his investment.||Being market-linked, the returns depends on the scheme, but an investor can expect an approximate return of 12-14%.|
|What are the tax benefits?||The invested amount offers tax deduction under Section 80C, but gains are taxable.||LTCG under ELSS is taxed @ 10% over and above Rs. 1 lakh|
|What are the charges applicable?||There are complex and multiple charges like policy administration charges, premium allocation charges, mortality charges, etc.||Exit load and fund management charges are specified in the SID clearly and are easy to understand.|
|What about liquidity?||Funds can be available after the lock-in of 5 years subject to further policy conditions.||Funds will be available after the lock-in of 3 years.|
8. Best ULIP Plans to invest in this year
|ULIP Plans||Entry Age||Minimum Premium||Premium Allocation Charge||Policy Admin charge||No. of free switches in a year|
|Bajaj Allianz Future Gain||1 to 60 years||Rs 25,000||0% to 1.5%||Rs 33.33 per month||Unlimited|
|PNB Metlife Smart Platinum||7 to 70 years||Rs 30,000 to Rs 60,000||1.25% p.a||Rs 40||4|
|MAX Life Fast Track Growth Fund||18 to 50 years||Rs 25,000 to Rs 1 lakh||2%(Single Premium) to 4% (Annual premium)||Rs 1,500 per year||12|
|SBI Life Wealth Assure||8 to 65 years||Rs 50,000||3% of Single Premium||Rs 45 per month||2|
|HDFC Life Pro Growth Plus||14 to 65 years||Rs 2,500 to Rs 10,000||2.5% of Annual premium||Rs 500 per month||Unlimited|