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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
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.
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The CBDT has issued guidelines for the calculation of taxable income if the annual premium of ULIP is more than Rs 2.5 lakh.
In the last Budget 2021the government had announced that proceeds from ULIP shall be taxable if the annual premium exceeds Rs 2.5 lakh in any year of the term of the policy.
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.
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.
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.
Following are some important factors you should weigh in before investing in ULIPs:
ULIPs are categorized based on the following broad parameters:
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. |
| Particulars | 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. |
| 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 |
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).
In every investment, there are various charges that need to be paid. In the case of ULIP, the charges can be broadly classified as:
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.
The sum assured for ULIP is the minimum guaranteed amount offered by ULIP to the nominee in the case of the policyholder’s death.
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:
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.
| Feature | Systematic Investment Plan (SIP) | Unit Linked Insurance Plan (ULIP) |
| Goal | Benefits of investment | Benefits of both insurance and investment |
| Investment Area | Majorly in the equity market | Both in equity and debt markets |
| Switching Facility | Free switching between funds available | Limited number of free switches available in a year |
| Governing Agency | SEBI | IRDAI |
| Lock-in Period | 3 years | 5 years |
| Fund Management Charges | 2.50% | 1.35% |
| Death Benefits | None | Paid to the beneficiary of the policy |
| Tax Benefits | Available 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 |
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.
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.
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.
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.
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.
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
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.
Life Insurance Corporation (LIC), a public sector insurance company in India, offers three ULIP products. The products are:
Here are a few tips to maximise your ULIP investment returns:
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.
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).
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.
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.
Here are the key differences between Unit Linked Insurance Plan (ULIP) and Equity Linked Savings Scheme (ELSS):
Here are two ways to track ULIP performance:
Absolute Returns = [(Current NAV – Initial NAV)/Initial NAV]*100
CAGR = {[(Current NAV/Initial NAV)^(1/Number of Years)] – 1}*100
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.
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.
Any investments made in ULIP gets income tax deduction under Section 80C of the Income Tax Act, 1961.
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:
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
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.
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).
| Parameter | Unit Linked Insurance Plan (ULIP) | Postal Life Insurance (PLI) |
| Purpose | Investment and Insurance | Purely Insurance |
| Eligible People | Employees of:
|
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
ULIP products come with a lock-in period of five years.
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