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Unit Linked Insurance Plans: ULIP
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Financial health in today’s times is of immense importance. And the two major ways to attain financial independence is through making investments and building savings. ULIP has emerged as a viable investment and savings insurance product and has gained much popularity over the years. It offers the joint benefits of life insurance coverage and investment benefits through market-linked returns. They are ideal to build long term corpus and are suitable for adequate financial coverage. Let us all know all about ULIPs.
What is ULIP?
ULIPs, short for Unit Linked Insurance Plans, is a blend of investment and insurance products. These plans offer the potential to create wealth and acquire financial security of a life cover simultaneously. Under ULIPs, a portion of the premium you pay is directed towards the Life cover and the leftover portion is directed to investments. There are different types of investment funds available under ULIPs. You can choose a fund as per your risk appetite and the premium would be allocated to that fund. Thereafter, as the fund grows, the investment of the policyholder also grows. The amount invested and the returns earned on it are reflected in the fund value which shows the total value accumulated by the policyholder.
In case of death of the insured, higher of the fund value or the sum assured is paid. In case of maturity, on the other hand, the fund value is paid.
For example, say the details of a unit-linked plan are as follows –
Equity fund (invests primarily in equity)
Debt fund (invests primarily in fixed income instruments)
Balanced fund (mix of equity and debt)
|10 times the annualized premium
|Premium paying tenure
Mr. Mitra, a non-smoking male aged 30 years, invests INR 50,000 in the plan and chooses the equity fund. The sum assured would be INR 5 lakhs. Appropriate charges would be deducted from the premium for providing insurance cover and for managing the investments. After deduction of the charges, the remaining premium would be invested in the equity fund. If the assumed rate of return is 8% per annum, here’s what would be paid –
|If Mr. Mitra dies in the 10th policy year
Fund value at the time of death = INR 705,097
Sum Assured = INR 5 lakh
Death benefit = INR 705,097
|If Mr. Mitra survives the plan duration
Fund value at the end of 20 years = INR 20,08,287
Maturity benefit = INR 20,08,287
Different types of ULIPs
The different types of ULIPs that are sold in the market include the following:
1. Endowment ULIPs:
This type of ULIP is a simple savings-oriented plan that provides either a death benefit or a maturity benefit, depending on whether the insured dies or survives the plan tenure.
2. Child ULIPs:
As the name suggests, Child ULIPs are offered for creating a financial corpus for children to secure their futures. These are also savings oriented ULIPs with an inbuilt premium waiver rider. The rider waives the premium if the parent dies but the plan continues. Premiums are paid by the company and on maturity, the fund value is paid.
3. Pension ULIPs:
Pension ULIPs are directed towards creating a substantial fund for retirement. This aim is achieved by providing market-linked returns on the invested premiums. You can pay premiums and build a considerable corpus over the policy tenure under pension ULIPs. Then, on maturity, you can use the corpus to avail annuities.
Benefits of investing in ULIPs
Some of the salient benefits of investing in ULIPs have been briefed below:
- Long-term goals:
ULIPs are a great choice of investment to achieve long-term goals. If you have long-term goals like education, marriage, buying a new car or house etc., investing in ULIPs can prove to be beneficial. The money you invest would earn compounded market-linked returns and as a result, create a corpus for your long term goals.
- Income Tax Benefits:
The premiums you pay towards a ULIP are also eligible for tax benefits. Under Section 80C of the Income Tax Act, premiums paid for a ULIP are eligible for tax deduction up to INR 1.5 lakhs provided the premium is up to 10% of the sum assured. Additionally, under Section 10(10D), the returns you receive from the policy on maturity are also exempted from income tax if the premium amount was up to 10% of the sum assured. Detailed tax benefits on ULIPs are explained below.
- Flexibility to Switch:
This benefit, which is unique to ULIPs, caters to the changing risk appetites of changing markets. There is a provision under these plans to switch between the chosen funds in accordance with the market outlook. Most often than not, changing portfolios incur charges, but with ULIPs a few numbers of switches are free. You can, therefore, switch your investments for maximum returns and protection against market volatility without incurring any tax implications.
- Invest as per risk appetite:
Based on your appetite for risk in investments, ULIPs provide the opportunity to choose a mix of market-linked funds that you can invest in. ULIPs offer equity funds, debt funds, liquid funds and a mix of equity and debt funds too to suit the investment needs of different policyholders.
- Life cover:
With ULIPs you get a life cover coupled with market-linked returns. This is a source of financial security that a taxpayer’s family can fall back on during needful times. The death benefit ensures that your family receives financial assistance in case of your untimely demise and the sum assured is the minimum benefit guaranteed on death even if the markets are volatile.
- Build corpus:
These plans can be great wealth-creating tools because of the diversity of funds offered under the plans. Furthermore, with a lock-in period of five years, these plans can help inculcate a habit of disciplined investing. They are generally long-term contracts, and the accumulated long-term benefits provide good security and protection and also help you in building a corpus.
What is Covered?
ULIPs provide the following coverage benefits:
- Death benefit
One of the major covers that ULIP provides is the life insurance cover. If the insured dies within the policy tenure, a death benefit is paid which is usually higher of the fund value or the sum assured.
- Maturity benefit
The other major cover that ULIP provides is the financial returns which you can earn by investing in equity and debt funds. Your investments grow as per the market movements and if the plan matures, the fund value is paid as maturity benefit.
What is not Covered?
ULIPs do not cover all kinds of deaths. So, it has the following exclusions:
- Death caused by racing or other risky sports.
- Suicidal death committed by the insured within 12 months of the date of buying the policy or revival of the policy. In such cases, the fund value is paid
- Death caused by drug or alcohol abuse.
- Accidental death under the influence of alcohol.
How to Compare ULIP Online?
It is advisable to compare the policies of various insurers and pick the plan based on your family needs before buying a ULIP plan. When you purchase ULIP online, you can also get discounts on the premium amount. Few tips to select the best ULIP plan are as follow:
- The sum assured allowed
Though ULIPs allow the sum assured of up to 10 times the annualized premium, some plans allow even higher multiples of sum assured. So, compare the sum assured multiple offered by different ULIP plans and choose one based on your coverage needs.
- Charges under the plan
Compare the quantum of charges charged by different plans and choose a plan which has the lowest charge structure so that the maximum portion of your premium is invested and you get higher returns.
- The historical return of funds
Compare the returns offered by funds of different ULIPs and choose a plan whose fund has been offering consistently higher returns. This would help you get maximum returns on your investments.
- Benefits offered
Many ULIPs, nowadays, offer guaranteed additions, loyalty additions, monthly incomes, lifelong coverage, etc. These benefits enhance the scope of the policy and make the plan better. So, compare the benefits offered and choose a comprehensive plan
- Claim settlement ratio of the insurance company
Claim settlement ratio indicates the percentage of claims settled by the insurance company against the total claims made. Opt for an insurer who has a high claim settlement ratio so that the probability of claim settlements increases.
ULIP Premium Allocation/Charges
Premium Allocation Charges (PAC) are charged at a higher rate in the initial years of the plan and are deducted from the premium received at a fixed percentage. This charge usually covers the initial and renewal expenses and the intermediary’s commission expenses. PAC reflects a certain portion of the premium and the balance is used to purchase units at current net asset value (NAV). Suppose, if the PAC is 5% then INR 5000 is deducted from the premium of INR 1 lakh and the balance of INR 95000 will be allocated in the fund options. It may be charged for the initial 5-7 years of the policy and may be nil later.
Besides the premium allocation charge, some of the other charges of ULIP are as follows:
|Fund Management Charges
|The insurer shall levy this for the management of the funds of the policyholder. These charges shall not exceed 1.5% as according to the guidelines of IRDA. The charges may vary from one fund to another.
|Policy Administration Charges
|Some policy management expenses are incurred by the insurer and these are policy administration charges. The charges shall cover the expenses incurred for paperwork, premium intimation, etc. These charges are imposed on a monthly basis and are either fixed or may be increased at a given pre-determined rate.
|The insurer charges switching charges when the policyholder switches between fund options.
|Surrender or Discontinuation Charges
|These charges will be charged if the policyholder surrenders the plan before the completion of the first 5 policy years
|Mortality charges are those which the company charges for providing insurance cover to the insured. This charge depends on the age and the risk cover offered by the plan
ULIP Investment Tips
Over the years, ULIPs have gained prominence as an investment tool due to their dual benefit of providing life security and wealth creation through market-linked returns. Let’s analyze a few tips on ULIP investment:
1. Personal Financial Planning:
Personal financial planning is a process for identifying short-term and long-term financial requirements. ULIP is a long-term insurance-cum-investment policy that takes care of both investment and insurance needs. You can, therefore, invest in ULIPs for your financial goals wherein the corpus created by the plan would be used for the fulfilment of your goals.
2. Compare Benefits:
Several ULIP plans are offered by different companies. Thus, the benefits of the various ULIP plans must be compared before any plan is purchased and key factors such as premium payments, asset allocation, past performance, etc. should also be considered.
3. Risk Assessment:
Investments have a popular slogan: higher the risk, higher the income. But taking high risks isn’t a cup of tea for everyone. Few investors are more interested in maintaining capital and a consistent return. Your risk-taking potential determines the funds you choose. So assess your risk profile and then choose investment funds accordingly.
4. Investment Goals:
Goal-based investment simply lists some of the financial objectives that you plan to achieve in the near future. Your priorities can be anything from financing your dream marriage, buying a dream home, funding your children’s education, or raising funds for your retirement. You need to develop a time frame to achieve your goals and then you can invest in ULIP as an investment option to help you achieve your goals.
5. Lock-in Period:
ULIPs come with a 5-year lock-in period that can help investors develop a disciplined investment habit and save taxes at the same time. You would not be allowed to surrender the policy before the completion of the lock-in period or make partial withdrawals.
6. Long-Term Horizon:
ULIPs offer attractive retrains over a long term horizon. ULIP plans are therefore most appealing to individuals seeking to invest and save financial targets for their mid-term to long-term needs. So, if you have a long term goal for which you need to invest, you can invest in ULIPs.
Best ULIP Plans to invest in 2020
The top 5 ULIP plans in India are listed below:
|HDFC Life Click 2 Wealth
Single: INR 24000
Annual: INR 12000
|Bajaj Allianz Life Goal Assure Plan
|Aegon Life iMaximize Insurance Plan
|LIC’s Nivesh Plus
|Max Life Fast Track Super Plan
ULIP Tax Benefits
There are various tax benefits which are available on ULIPs. These include the following -
- Tax benefit under Section 80C
With ULIP you can benefit from tax deductions under Section 80C of the Income Tax Act up to a maximum of INR 1.5 lakhs on the premiums paid. The total premium paid should, however, be less than 10% of the sum assured. For instance, if you pay INR 15 lakhs and your premium is less then INR 1.5 lakhs, you can claim the full amount as a deduction in accordance with Section 80C. In contrast, if your premium is greater than 10%, then your tax deduction will be limited to 10% of the sum assured. So, if the premium is INR 2 lakhs and the sum assured is INR 15 lakhs, the deduction would be available on INR 1.5 lakhs only.
- Tax benefit under Section 80CCC
Under Section 80CCC, you can claim up to the limit of INR 1.5 lakhs, provided that you have invested in a ULIP retirement/pension plan. The deduction of INR 1.5 lakhs includes deduction under both Section 80C and Section 80CCC.
- Tax benefit under Section 80D
If you buy a critical illness rider or a surgical rider under a ULIP plan and pay the premium for such rider, the premium paid would be allowed as a deduction under this Section. The maximum limit of deduction is INR 25,000 which increases to INR 50,000 if you are aged 60 years and above.
- Tax benefit under Section 10(10D)
Under Section 10(10D) of the IT Act, the amount received on partial withdrawal or maturity of ULIP policy is exempted. To avail, the deduction the premium payable should not exceed 10% of the total sum assured. If the policy has been purchased before 1st April 2012, the premium should not exceed 20% of the sum assured for claiming the tax benefit. The death benefit, however, is completely tax-free irrespective of the premium amount and the sum assured.
- Tax benefit under Section 10(10A)
Under Section 10(10A) of the IT Act, if you have chosen a ULIP retirement/pension plan, you can withdraw tax-free up to 33% of the corpus on maturity and claim tax benefit on such withdrawal under this section. Although according to the new norms of pension plans, you can withdraw 60% of the corpus, but tax benefits are extended only up to 33% of the corpus and the rest would be taxable.
Be sure to pay a premium regularly to enjoy ULIP tax benefits to the fullest. You will not be eligible for tax benefits under Section 80C if you discontinue payments of ULIP before 2 years.
You can purchase riders by paying a nominal charge under your ULIP policy. It is a great way to customize your unit-linked insurance plan and to improve your coverage. Basically, you add new benefits to your current policy by purchasing a low-cost rider. Here are popular riders that can be added to your current ULIP:
|Premium Waiver Rider
|If your income earning capacity is compromised due to permanent disability due to accident or incapacity to work due to serious illness, then a premium waiver rider guarantees waiver of future premiums but your investment and life cover continues. The premiums are paid by the insurance company and your fund value continues growing till death or maturity
|Critical Illness Rider
|In the event of a serious illness, you need the best possible care and financial assistance and don’t want medical expenses to erode your savings. Thus, by adding critical illness rider to your ULIP policy you get a lump sum amount if you suffer from a covered critical illness during the policy tenure
|Accidental Death Rider
|This rider provides an additional element of financial assistance, in addition to the life insurance coverage provided by ULIP in case of death of the insured due to an accident. So, along with the death benefits of the basic ULIP plan, the nominee of the policy will receive an additional rider sum assured.
|Accidental Permanent Total/Partial Disability Rider
|In case of total or partial disability of the insured due to an accident, this rider pays a lump sum amount depending on the terms and conditions of the rider. The addition of this rider to the ULIP base policy ensures you and your family do not have to worry about the lack of finances to fulfil your goals in case of disabilities
|Family Income Rider
|In case the insured dies during the policy term, a certain percentage of the sum assured of this rider will be paid annually to the nominee of the insured until the policy matures.
1. Is ULIP a good investment option?
ULIP is the ideal solution for you if you are searching for an avenue that helps to create long-term wealth. This plan provides you with the double benefits of savings and protection. It provides life cover with good returns and contributes to tax saving. ULIPs have, therefore, become one of the best investment options in today’s times.
2. What are different types of fees and charges in ULIP?
The charges in the case of ULIPs are as follow:
- Premium Allocation Charges: This represents a percentage of the premium paid as commission to the middleman before the units are allocated to the policies
- Mortality Charges: This charge covers the cost of insurance coverage under the plan. This charge depends on the variety of variables such as health status, coverage amount, age, etc.
- Policy Administration Charge: These are charges for administration of the plan during the policy tenure. This charge may be flat or vary at a predetermined rate throughout the policy period
- Fund Management Charges: These are the charges levied for the management of the funds and deducted before the NAV is achieved
- Fund Switching Charges: Switching is referred to as transfer of funds. In general, a limited number of switches are allowed without charge on an annual basis and subsequent switches are chargeable, say INR 100 or INR 250 are charged per switch
- Surrender Charges: Surrender charges may be deducted, where appropriate, for surrendering the policy before 5 years.
3. Is income from ULIP taxable?
ULIP maturity proceeds are exempt from tax, as provided for in Section 10(10D) of the Income Tax Act. If ULIP investors die within the term of the policy, the death’s benefit and the amount received on death shall be exempted from tax.
4. What is the minimum lock-in period for ULIP?
The minimum lock-in period for ULIP is 5 years from the date of issuance of the policy.
5. What is fund value in ULIP?
In the case of ULIP, the policyholder may choose to invest in suitable funds on the basis of his risk appetite and market conditions. The cumulative monetary value of the units held by the policyholder is referred to as fund value. The fund value shall be determined on a particular day by multiplying each unit’s Net Asset Value (NAV) on that particular day by the number of units held. On the basis of NAV, the fund value keeps on changing. For example, if the policyholder owns 20,000 units at the current price of approximately INR 20 per unit, the fund value will be 20000*INR 20= INR 4 lakh.
6. What is ULIP NAV?
NAV or Net Asset Value is the value of each unit of the fund on any particular day. The formula of NAV:
NAV= [Assets - (Liabilities + Expenses)]/Outstanding units.
7. How much life cover is offered in ULIP?
Life cover is offered as a multiple of the premium amount. In case of regular premiums, a cover of up to 10 times of the premium is usually offered. In the case of single premium plans, however, coverage of up to 1.25 times the premium amount is usually offered.
8. Does ULIP offer Guaranteed Returns?
ULIP does not offer guaranteed returns. Since ULIP is a product linked to the market, the returns are dependent upon market conditions and funds’ performance.
9. Which is better: ULIP or Mutual Fund?
Mutual funds and ULIPs are attractive opportunities for retail investors seeking to grow their capital in the long term. The two most popular options have their own variety of features, drawbacks, to be considered by an investor before the choice is made. If you happen to be a short-term or medium-term investor who at the same time needs higher liquidity and have risk appetite of medium or high, then mutual funds are a preferred one. However, if you are a long-term investor who needs coverage of life insurance and has a moderate risk appetite, then ULIPs are best suited for you.
10. Which is better: ULIP Vs ELSS?
ULIPs and ELSS are two different products for different purposes. ULIP is a combination of life insurance and investment offered by life insurance companies, whereas ELSS is an equity fund. Both investments save taxes, but they are different from one another.
Investment in ELSS should be considered for those who are looking for a short-term investment opportunity with high returns. Returns on equity are relatively better than most financial instruments. However, you’ve got to invest in it for a long time to make the maximum profit. With the ELSS Systematic Investment Plan (SIP) path, small volumes can be invested and high returns can be achieved. With a low lock-in period of 3 years, ELSS is a short to medium-term investment avenue.
On the other hand, as we know ULIP provides dual benefits i.e. Insurance and investment. ULIPS have a lock-in period of 5 years and allow you different types of investment funds too. So, ULIPs have better features over ELSS funds but you should assess your investment needs before choosing between these two.
11. What happens if I surrender ULIP?
ULIP may be discontinued/surrendered. You may have to pay the surrender/discontinuation charges when you choose to surrender your ULIP investment before the completion of the first 5 years. When you surrender, the fund value is paid and the plan is terminated. You lose the insurance coverage and the return potential. It is therefore not advisable to surrender your ULIP plan investment.
12. What are the maturity benefits and death benefits in ULIP?
Death and maturity benefits are applicable to all ULIP schemes, irrespective of the insurance provider from which the plan is availed. In case of the tragic demise of the policyholder, the death benefit is higher of the sum assured or the fund value. In case of maturity, however, the fund value is paid.
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