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Unit Link Insurance Plan ( ULIP )

Updated on :  

08 min read.

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 ULIP

Unit 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.

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.

Lock-in-period of ULIP

One 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.

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.

Things to consider as an investor

Following 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.

Types of ULIPs

ULIPs are categorized based on the following broad parameters:

Funds that ULIPs invest in

  • Equity Funds: Where the premium paid is invested in the equity market and thereby is subject to higher risk.
  • Balanced funds: Where the premium paid is balanced between the debt and the equity market to minimise the risk for investors.
  • Debt Funds: Where the premium is invested in debt instruments which carry a lower risk but in turn also offer a lower return.

End use of Funds

  • Retirement Planning: For those of you who plan to invest for the retirement days while you are still employed.
  • Child Education: You can invest with a long-term goal of saving to fund your child’s education or save for some unforeseen circumstances.
  • Wealth Creation: You can make investments to build a heavy corpus that you can utilize for a future financial goal

Death benefit to Policy Holders

  • 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.
  • Type II ULIP: This pays the assured sum value, plus the fund value to the nominee in case of the death of the policyholder.

ULIPs Vs Mutual Funds

Here is a comparison between the two:

ParticularsULIPsMutual Funds
NatureInvestment cum insurance productPure Investment product
WithdrawalOnly after lock-in-period of 5 yearsCan 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.
ChargesMortality charges, premium allocation charge, fund management charge and administration chargesNo entry load, the annual fund management charges apply and an exit load, if applicable.

ELSS vs ULIP – Comparative Analysis

Particulars ULIP (Unit Linked Insurance Plan) ELSS (Equity Linked Savings Scheme)
Lock-in periodULIPs have a mandatory lock-in of 5 yearsELSS 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.

Best ULIP Plans to invest in this year

ULIP PlansEntry AgeMinimum PremiumPremium Allocation ChargePolicy Admin chargeNo. of free switches in a year
Bajaj Allianz Future Gain1 to 60 yearsRs 25,0000% to 1.5%Rs 33.33 per monthUnlimited
PNB Metlife Smart Platinum7 to 70 yearsRs 30,000 to Rs 60,0001.25% p.a Rs 40 4
MAX Life Fast Track Growth Fund18 to 50 yearsRs 25,000 to Rs 1 lakh2%(Single Premium) to 4% (Annual premium)Rs 1,500 per year12
SBI Life Wealth Assure8 to 65 yearsRs 50,0003% of Single PremiumRs 45 per month2
HDFC Life Pro Growth Plus14 to 65 yearsRs 2,500 to Rs 10,0002.5% of Annual premiumRs 500 per monthUnlimited

Income Tax Benefits

Premium paid on ULIPs is eligible for a deduction under Section 80C up to a maximum of Rs 1.5 lakhs during a year. Further, the amount you receive on maturity is tax exempt under Section 10(10D).

Types of fees and charges

In every investment, there are various charges that need to be paid. In the case of ULIP, the charges can be broadly classified as:

  • Premium Allocation Charge
    Premium Allocation Charge is deducted as a fixed percentage from the premium paid in the initial years of the policy. This is charged at a higher rate. The charges include the initial and renewal expenses and intermediary commission expenses. It is a front load charge as it is deducted from your premium paid.
  • Mortality Charges
    This charge is to provide for the insurance coverage under the plan. Mortality charges depend on a number of factors like age, sum assured, etc., and is deducted on a monthly basis.
  • Fund Management Charges
    Fund Management Charge is the fee imposed by the insurance company for the management of the various funds in the ULIP. It is levied for the management of the funds and is deducted before arriving at the NAV figure. The maximum charge allowed is 1.35 percent per annum of the fund value and is charged daily. Generally, insurers levy the maximum amount allowed in equity funds, while the charge on non-equity funds is much lower.
  • Partial Withdrawal Charge
    ULIPs have the option of partial withdrawals of funds. Some plans offer unlimited withdrawals, but some restrict it to 2-4 withdrawals. These withdrawals can be free for up to a certain limit or you can be charged based on your transactions.
  • Switching your funds
    The moving of funds or investments between options is called switching. There are options to switch your funds for free up to a certain limit per year. Any further changes might incur a charge of Rs. 100 -Rs.250 per switch.
  • Policy administration charges
    This charge is levied for the administration of the policy and it is deducted on a monthly basis by the cancellation of units from all funds chosen. This charge can be levied at a fixed rate or as a percentage of your premium.
    ULIP as a mode of investment is a good choice given it offers the benefits of insurance with investment. With part of the investment spread across stock markets, you stand to gain higher returns. This also means that your investment is subjected to market risks. If your risk profile meets the tradeoff, this could be worth exploring.

Frequently Asked Question

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
How to invest in ULIP?

Step 1: Research on the ULIP products available in the market and list out all the products from various vendors.

Step 2: Understand the features of the life cover as well as the investment profile of each of the ULIP products.

Step 3: Opt the product that suits your investment and insurance goals.

Step 4: Contact the respective insurer online or at the insurance office and enquire about the product in detail.

Step 5: If you are satisfied, purchase the ULIP product from the insurer.

SIP or ULIP? Which is better?
FeatureSystematic Investment Plan (SIP)Unit Linked Insurance Plan (ULIP)
GoalBenefits of investmentBenefits of both insurance and investment
Investment AreaMajorly in the equity marketBoth in equity and debt markets
Switching FacilityFree switching between funds availableLimited number of free switches available in a year
Governing AgencySEBIIRDAI
Lock-in Period3 years5 years
Fund Management Charges2.50%1.35%
Death BenefitsNonePaid to the beneficiary of the policy
Tax BenefitsAvailable only on the ELSS up to Rs.1.5 lakh per financial year.Available on the premiums paid towards the policy and maturity proceeds u/s 80C and 10(10D) of the Income Tax Act, 1961
Which is better? ULIP or mutual fund?
  • 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.
What does ULIP mean?

ULIP stands for Unit Linked Insurance Plan, which is a combination of insurance and investment products. It provides life cover along with a way for wealth creation.

ULIP & NSC? Which is giving tax benefit u/s 80c?

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.

Why is ULIP bad?

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.

What is the death claim payable in the case of ulip?

The death benefit offered in the case of ULIP is the amount payable to the nominee of the policy in the event of the policyholder’s death during the policy term.

What is the maturity benefit payable if a ulip matures?

A maturity benefit of ULIP is the amount offered by the insurer to the policyholder if the policyholder survives beyond the maturity period of the policy. The maturity benefit is equal to the amount of the fund value.

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.