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1. What is ULIP

ULIP or Unit Linked Insurance Plan 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 goal. 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 an investor makes 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 from 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 how the market is performing. It has been noticed that many of the ULIP buyers do not have the time or adequate knowledge to understand the mix they must keep between debt and equity and also when to make the right switch. Therefore, if you are someone who has deep knowledge of how the fluctuation of interest rates and equity returns work – this may be the product for you. Also, it is wiser to invest in a ULIP with a long term horizon, of at least 10 years.

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3. 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, an investor may not really reap the benefit of the policy unless he holds it for the entire term of the policy which can range from 10 to 15 years.

4. Benefits of ULIP

  • Life cover: First and foremost, ULIPs offer a life cover coupled with investment. If offers security that a taxpayer’s family can fall back on in case of untimely death of the taxpayer
  • Income tax benefits: Not many are aware that that premium paid towards a ULIP is eligible for a 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
  • Finance Long Term Goals: For long-term goals like buying a house, a new car, marriage, etc ULIP is a good option as the money gets compounded. As a result, the net returns are generally more 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. Further, under ULIP, the mantra is always to keep the policy going for a longer time horizon to reap the best out of it
  • Flexibility of a portfolio switch: As already mentioned earlier, 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 allow a few numbers of switches free of cost

5. Things to consider as an investor

Following are certain factors one should weigh in before investing in ULIP:
  • Personal financial goals: If your financial goal is about wealth creation and you want to save money for retirement, ULIP is one of the good 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 in the background of expenses, premium payments, ULIP performance, the nature of funds that the ULIP invests in to ascertain the returns from investment in the particular ULIP
  • Risk factor: Since ULIP investment is generally not diversified, the risk 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 ULIPs

ULIPs are categorized based on the following broad parameters:

a. Funds that ULIPs invest in

i. Equity Funds: Where the premium paid is invested in the equity market and thereby riskier
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 come with a lower risk but also a lower return

b. End use of Funds

i. Retirement Planning: For those who plan to invest for their retirement days while they are employed
ii. Child Education: Investment made with a long-term goal of saving to fund a child education would come to one’s rescue during unforeseen circumstances
iii. Wealth Creation: Investment made to build a heavy corpus to be utilized for a financial goal

c. Death benefit to Policy Holders

i. Type I ULIP: Which 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: Which pays the assured sum value plus the fund value to the nominee in case of death of the policyholder

7. ULIPs Vs Mutual Funds

Here is a comparison between the two:

Particulars ULIPs Mutual Funds
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 charge and an exit load, if applicable.

8. Some of the ULIPs 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

9. Income Tax Benefits

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

10. Types of fees and charges

In every investment, there are various charges that need to be paid. In the case of ULIP, these are the broadly classified fees and charges.

a. Premium Allocation Charge

Premium Allocation Charge is deducted as a fixed percentage from the premium paid in the initial years of the policy, it 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.

b. 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.

c. Fund Management Charge

Fund Management Charge is charged by the insurance company to manage various funds in the ULIP. It is levied for management of the funds and is deducted before arriving at the NAV. The maximum allowed is 1.35 percent per annum of the fund value and is charged daily. Generally, insurers levy the maximum allowed in equity funds, while the charge on non-equity funds is lower.

d. Partial Withdrawal Charge

ULIPs have options for partial withdrawals of funds. Some plans offer unlimited withdrawals, but some restrict it to 2-4 withdrawals. These withdrawals can be for free up to a certain limit or can be charged based on your transactions.

e. Switching your funds

Moving 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.

f. Policy administration charge

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 at a fixed rate or a percentage of your premium.

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