Unit Link Insurance Plan ( ULIP )

 

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 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 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 benefit of the policy unless you hold it for the entire term of the policy which can range from 10 to 15 years.

4. Benefits of ULIP

 

5. Things to consider as an investor

Following are some important factors you should weigh in before investing in ULIPs:  

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 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 Funds

  i. Retirement Planning: For those of you who plan to invest for the retirement days while you are still employed

ii. Child Education: You can investment 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 Holders

i. 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 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 charges apply 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 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).

10. 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:

a. 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.

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 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.

d. 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.

e. 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.

f. 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.