All you need to know about ULIPs in India?

All you need to know about ULIPs in India?

Unit Linked Insurance Plans or ULIP, as it is popularly known is a unique financial product which was introduced in the insurance industry as a major improvement over its traditional endowment policies. ULIP was first introduced by UTI (Unit Trust of India), Mutual Fund. Later, in 2005 when the Insurance Regulatory and Development Authority of India (IRDAI) laid down guidelines for ULIP, many insurance companies forayed into ULIP business. In this article, let’s learn about ULIPs in detail.

What is ULIP?

ULIP is an integrated financial product that offers the best of both the worlds – insurance and investment. Basically, ULIP or Unit Linked Insurance Plan is a hybrid product offered by insurance companies that provides the dual benefit of protection and capital appreciation. Being a market-linked investment product, ULIP gives its investors opportunities to earn from capital market. ULIP is structured differently when compared to other insurance products offered by the insurance providers. Let’s understand how ULIPs are structured and how do they work.

How does a ULIP Plan work?

ULIP or Unit Linked Insurance Plan is market-linked. It is structured to provide the benefit of both risk cover and wealth creation by earning a return on market investment. When you invest in ULIP, an insurance plan, you will make premium payment as specified by the product or plan. The amount invested in the form of the premium is adjusted for the relevant charges, which are stated beforehand. After this, a part of the net premium will be put aside for providing life cover (which is also deducted as mortality charges) and the other part will be invested in the capital market through funds comprising of equity, debt and money market instruments in varying proportion. Depending upon the plan variants and fund choices made available by the ULIP plan, you can make your investments keeping in mind your risk profile. Every fund will have a risk rating. ULIP plans come with a lock-in period of 5 years.

When it comes to ‘investment’ part ULIP pools investors (policyholders) money and invest them into funds chosen by them. The total corpus of the funds is divided into units and the units will be allocated to each policyholder in the proportion of an invested amount. Depending on the funds market performance, it’s a per-unit value (net asset value) will increase or decrease.

On maturity of the ULIP plan, the investor will receive the fund value on the date of maturity. The fund value is the total value of all the fund units across all the investment funds opted in the policy. In case, investor dies during the policy period, then the nominee designated in the policy or the beneficiary of the policy will get the higher of the following amount:

  • Fund value on the date of demise
  • Sum assured (pre-agreed)
  • 105% of total premiums paid till the date of demise

There is also a class of ULIPs that offer both fund value + sum assured as a death benefit.

For example, let’s say Mr Arun has taken ULIP plan for 15 years with INR 5 lakhs sum assured and he is been paying INR 50,000 every year. In this case, let’s say unfortunately Arun dies in the 6th year of the policy. He has paid 50,000X 6 = INR 3, 50,000 premium amount. Let’s assume fund value on the date of his demise is INR 4, 20,000. His nominee would receive INR 5, 00,000 (sum assured) which is higher of all. In case the ULIP had offered a double death benefit, then the nominee would receive INR. 4, 20,000 + INR 5, 00,000 = INR 9, 20,000 as death benefit.

Who can invest in ULIP Plan?

Though ULIP offers flexibility to the investor, it is primarily a long-term investment product. ULIPs do not come with a high-risk cover. ULIP is ideal for investors of any risk profile and also Individuals seeking additional insurance cover along with market investment opportunities. ULIP invests in the capital market and the degree of risk may depend on the fund chosen by the investor. However, the investor has convenience and flexibility to choose based on the risk profile and on the basis of specific financial goals. ULIP investments are ideal for any investor irrespective of the risk-taking ability starting from conservative to aggressive risk profile. ULIPs are suitable for investors with any medium and long-term financial goals such as retirement, higher education or dream vacation etc. In short, ULIP plans are suitable for:

  • Investors having medium-term and long-term horizons for investment
  • Investors of any risk profile
  • Investors of all age across all life stage
  • Investors seeking risk cover along with an investment
  • Investors who would like to monitor their investments closely.

What are the Benefits of Unit Linked Insurance Plans?

Let’s explore the various benefits of ULIP plans. Following are some of them:

  1. Transparency:

    ULIP offers transparency to its investors relating to charge structure, expected rate of return and fund choices for investment etc. All the information are included in the fine prints of the policy which can be understood beforehand before signing on the dotted lines. Clarity and transparency give the confidence to investors that their hard-earned money invested in an ideal way. Timely reports shared by the insurance company to the investors regarding their investment gives an update on the current status of the investment.

  2. Flexibility:

    ULIPs come with many fund options with varying degree of risk. Investors are given the flexibility to choose an appropriate fund for investment based on their risk profile, goal and need. Investors are also allowed to switch from one fund option to another depending on the change in need and market situation. There is also a flexibility to increase the amount of investment via top-ups.

  3. Liquidity:

    After the initial five years, ULIPs gives liquidity by allowing investors to withdraw partially from the investment fund.

  4. Protection:

    Primarily being an insurance product, ULIP offers risk protection to the policyholder or person insured. On the death of the policyholder during the ULIP policy tenure, higher of the sum assured or fund value is paid as death benefits.

  5. Goal-based investment:

    ULIP is a goal-based investment wherein the main goal is long-term wealth creation through maximising returns from investment into the capital market. ULIPs helps the investor to build a corpus for their future goals such as retirement, children’s higher education, wedding and any big purchase etc

  6. Disciplined investment approach:

    ULIP inculcates the habit of disciplined investing in investors as the investment is done every year into the policy to yield good returns over the long-run.

  7. Diversification:

    ULIP offers a choice of diversification as it allows investors to invest in various financial instruments of the capital market. Investors are allowed to choose the funds in varying proportion for investment depending on the individual investor’s need and goal.

  8. Customisation:

    ULIP plans are customisable according to each individuals investing style, protection needs, goals and risk profile. There are various additional benefits are offered in the form of optional riders such as critical illness rider, accidental disability rider and waiver of premium rider. Individuals can customize the plan based on their need.

  9. Tax Benefit:

    ULIP is the most tax-efficient financial product that offers EEE benefits. Under the Income Tax Act, 1961, you can get below benefits by investing in ULIP plans:

    • Annual premiums paid towards ULIP investment is eligible for a tax deduction as per Section 80C of the IT Act that is up to the total limit of INR. 1.5 lakhs
    • There is no tax applicable on switches from one fund to another throughout the policy tenure.
    • Lump-sum paid on death or on maturity is also tax-free under Section 10(10D) of the insurance Act.

Best ULIP Plans in India:

There are numerous ULIP plans available in Indian Insurance market. Choosing the best plan would depend on each individual’s unique requirements in terms of risk appetite, future goals and need. We have listed down some of the best ULIP plans below.

ULIP Plan Name Entry Age Minimum Premium Premium Allocation Charges Policy Administration Charges Free Switches (Annual)
HDFC Life Click 2 Wealth Plan 30 days to 60 years For regular pay – INR 1,000 to INR 12,000 For single pay – 24,000 Nil Nil Unlimited
MetLife Smart Platinum Plan 7 years to 70 years INR 30,000 to INR 60,000 Up to a maximum of 1.25% per annum Maximum of up to INR 40 per month 4
Max Life Fast Track Super Plan 18 years to 50 years INR 25,000 to INR 1,00,000 2% for single premium policies 4% for regular annual premium policies INR 1,500 per year 12
SBI Life – Smart Wealth Assure Plan 8 years to 65 years INR 50,000 3% of single premium INR 45 per month 2
Bajaj Allianz Future Gain Plan 1 year to 60 years INR 3,000 to INR 36,000 0% to 1.5% INR 33.33 per month Unlimited
ICICI Pru Wealth Builder II Plan 0 years to 69 years INR 24,000 to INR 48,000 3% to 4% INR 500 per month NA
Aegon Life iMaximize Plan 7 years to 55 years INR 24,000 to INR 36,000 Nil INR 100 per month 4
Tata AIA Life Invest Assure II Plan 4 years to 55 years INR 75,000 to INR 1,20,000 5% of the annual premium 0.25% of the annual premium 12
HDFC Life Pro Growth Plus Plan 14 years to 65 years INR 2,500 to INR 10,000 2.5% of the annual premium Maximum of INR 500 per month Unlimited
LIC Market Plus- I Plan 18 years to 65 years INR 5,000 to INR 30,000 0.033 Maximum of INR 60 per month 4

How to Choose Best ULIP Plans?

Getting the best possible returns are of any investors dream. ULIPs can be a great choice to maximise your returns and create wealth over the long-run for meeting your life goals. As the product is structured uniquely to provide the triple benefit of life protection, wealth creation along with tax efficiency, ULIPs can be an ideal choice for investors of any risk profile and at any life stage. However, there are certain things to consider to make the best choice among a plethora of ULIP plan options available in the market. Following are the things to keep in mind to choose the best ULIP plans:

  1. Take the right amount of life protection:

    ULIPs being the insurance products secures your family by offering life cover. It is ensured that your loved ones are financially secure even when you are not around. 10 times of your ULIP premium can be availed as minimum life cover. Along with pure protection plans that you already have, you can get some additional coverage through ULIP investments. It’s important to access your coverage requirement before you make an investment so that you are adequately covered.

  2. Define your investment goals:

    You need to plan your investments carefully to achieve your life goals. Be it your life after retirement or your child’s dream of becoming a doctor or buying your dream, every life event needs to be planned carefully. It’s important to define your goals and start making investments accordingly as you get the clarity on time horizon and the approximate funds you need to meet the goals. You can choose the ULIP plan that suits your goal in every parameter.

  3. Know your risk appetite and choose funds accordingly:

    Risk-taking ability is the crucial element to be considered at the time of making ULIP investments that are market-linked. Higher the risk higher is the return. Also, at a young age, one can afford to take relatively more risk. To be aware of the risk appetite is important to choose the best suitable ULIP and to choose the best suitable investment fund. There is also fund switch options offered by ULIP plans. Consider the number of free switches available so that you can switch from one fund to another depending on the market condition and your changing needs.

  4. Consider fund performance and financial stability of the insurer:

    While choosing the ULIP plan, check the fund performances of the ULIP you have chosen. Specifically, the consistency of fund performance is what needs to be checked to understand how the fund responds to market swings. Though the past performances are not the indications of future performance, it gives you an idea on what to expect. Likewise, it’s important to consider the financial soundness and stability of the insurance provider while choosing ULIP by looking at the solvency ratio.

  5. Compare on the cost-benefit basis:

    ULIPs come in various types and with attractive features and benefits such as riders, top-ups and many more. It’s important to compare the features of various ULIPs alongside their cost can help you make a wise buying decision.

Key Features of ULIP Plan:

ULIP provides life protection along with an opportunity to grow your wealth. The ULIP plan comes with numerous attractive features. Key features of ULIP are:

  1. Investment fund switch:

    ULIP plan comes with many fund choices such as equity, debt or balanced funds. An investor can choose the fund of his/her choice. Later, during the policy term, the investor is allowed to switch from one fund option to another.

  2. Lock-in period:

    ULIPs come with a mandatory lock-in period of 5 years. ULIP can only be withdrawn after completion of these 5 years of the lock-in period. However, there will be surrender and discontinuation charges levied for the same.

  3. Premium redirection:

    ULIP also provides an option to redirect your future premiums to a different fund which is other than the base fund chosen by you.

  4. Top-up facility:

    ULIP allows you to increase the investment amount at any point in time during the policy term with the top-up facility.

  5. Partial withdrawal:

    ULIP comes with a flexible option of partial withdrawal to meet your emergency liquidity requirement. Part of your fund value can be withdrawn based on the terms and conditions of the policy.

Types of ULIP Plans in India:

ULIP plans can be categorised on the basis of death benefits, the purpose of investment and fund options.

Types of ULIPs on the basis of death benefits:

  1. Type I ULIP: In this, on the demise of the policyholder, the policy pays higher of fund value or sum assured as a death benefit to the nominee.
  2. Type II ULIP: In this, on the demise of the policyholder, the policy pays the sum assured + fund value as the death benefit to the nominee.

Types of ULIPs on the basis of purpose:

  1. ULIP for Wealth creation:

    This plan is particularly meant for building a corpus over the period of time. Young people in their early years of career can start investing in these plans to create wealth for the future. Here are some of the ULIPs for wealth creation

  2. ULIP Plan Name Entry Age Minimum Premium Premium Allocation Charges Policy Administration Charges Free Switches (Annual)
    HDFC Life Click 2 Wealth Plan 30 days to 60 years For regular pay – INR 1,000 to INR 12,000 For single pay – 24,000 Nil Nil Unlimited
    ICICI Pru Wealth Builder II Plan 0 years to 69 years Maximum – no limit INR 24,000 to INR 48,000 3% to 4% 3INR 500 per month NA
    SBI Life – eWealth insurance Plan 18 years to 50 years INR 10,000 onwards Nil NA NA
    Max Life Online Savings Plan 18 years to 60 years INR 36,000 annually Nil Nil Unlimited

  1. ULIP for Retirement planning:

    Planning for retirement life is very crucial. This plan specifically makes an investment for retirement life which will later be invested in annuities and paid out as regular pension. Here are some ULIPs for retirement:

  2. ULIP Plan Name Entry Age Minimum Premium Premium Allocation Charges Policy Administration Charges Free Switches (Annual)
    HDFC Click 2 Wealth with Golden Years Benefit Plan 0 to 60 years INR 1,000 to INR 24,000 annually Nil Nil Unlimited
    ICICI Pru Easy Retire Plan 35 years to 70 years INR 48,000 Up to 6% Maximum of INR 500 per month or INR 6,000 annually 4
    Max Life Online Savings Plan 18 years to 60 years INR 36,000 annually Nil Nil Unlimited
    Bajaj Allianz Life-Long Goal Plan No age limit INR 5,000 to INR 60,000 Up to 6% for offline plans Nil for online plans Nil Unlimited

  1. ULIP for the Higher education of children:

    There are ULIPs specially crafted for meeting children education requirement. These plans secure your child’s future education even when you are not around. ULIP child plans come with in-built Waiver of Premium (WoP) option. Here are some of the ULIP child plans

  2. ULIP Plan Name Entry Age Minimum Premium Premium Allocation Charges Policy Administration Charges Free Switches (Annual)
    HDFC Click 2 Wealth with 0 to 60 years INR 1,000 to INR 12,000 annually Nil Nil Unlimited
    Premium waiver Benefit Plan
    ICICI Pru Smart Kid Plan 20 years to 54 years INR 45,000 to INR 5,00,000 Single pay -3% Regular pay – 2% to 6% Maximum of INR 500 per month or INR 6,000 annually 4
    Max Life Online Savings Plan with premium waiver option Plan 18 years to 54 years INR 3,000 to INR 36,000 annually Nil Nil Unlimited
    Bajaj Allianz Future Gain with premium waiver benefit Plan 1 year to 60 years INR 2,500 to INR 25,000 2% INR 33.33 per month (increasing at 5% per annum) Unlimited

On the basis of investment funds:

Following are the ULIPs based on fund choices and risk category

  1. Equity funds:

    These are high-risk ULIP scheme that invests the majority of your premium into equity-based funds.

  1. Balanced funds:

    These are moderate risky ULIP schemes that invest your premium into balanced funds that strike a balance between debt instruments and equity.

  1. Debt funds:

    These are low-risk ULIP schemes that invest your premium majorly into debt funds that comprise of bonds and debt instruments.

Reason to Invest in ULIPs:

ULIP investment come with numerous benefits. Individuals of any life stage with any risk profile can consider ULIP for their long-term financial goals. Some of the important reasons to invest in ULIPs are as follows:

  1. To maximise returns:

    ULIPs are market-linked products, wherein you can choose to invest in different financial instruments through fund choices available. Based on your risk profile, you can choose to invest in an equity fund, debt fund, balanced fund or cash fund. Depending on your choice of fund and the risk category, your returns will vary. You are also allowed to switch from one fund another during the policy term. As the investment is market-driven, there is an opportunity to maximise your returns based on stock market performance.

  1. For life protection:

    As ULIPs are combination products, life protection is primarily offered along with an investment element. With the death benefits, ULIP assures the family of assured/investor is financially stable even when the assured is no longer around in this world.

  1. To achieve long-term financial goals:

    Investments into the capital market through ULIP can earn better over the long-term and help the investor to achieve many long-term goals such as retirement, higher education and marriage etc.

  1. For tax benefits:

    Besides every other benefit, the tax benefit is eye-catching for many. ULIPs help in a great way to reduce tax outgo as the premium paid qualifies for tax deduction under section 80C of the Income Tax Act, 1961. The best part is investing in ULIP is a tax-efficient option as it also provides the benefit of Section 10 (10D) of the Income Tax Act, 1961.

ULIP strikes a good balance between insurance and investment. Secure your family, maximise your returns and achieve your long-term financial goals.

Types of ULIP Charges:

ULIPs involve various types of charges details of which are clearly disclosed and stated in every ULIP’s policy document. Earlier, ULIPs were known to be of high-cost products in terms of charges. However, with the change in ULIP related regulations by the Insurance Regulator and Development Authority (IRDAI), revamped online ULIPs are considered to be cost-effective investments. Structure of charges may vary among insurance companies and plans. Let’s take a look at various charges that are levied in a ULIP plan.

  1. Premium allocation charges:

    Premium allocation charges is deducted as a fixed percentage of your ULIP premium. These charges are deducted before the allocation of investment units. Premium allocation charges include commission expenses, renewal expenses etc.

    For example, Premium collected on a ULIP plan is INR 1 lakh. Let’s say premium allocation charges for the first year is 5% of the premium received. Then, INR 5,000 will be deducted from the premium collected and the remaining INR 95,000 will be allocated to funds chosen by you.

    Premium allocation charges are front-loaded which are deducted beforehand every year when you make a premium payment, including renewal premium payments. However, these charges are more in the initial years and will reduce over the policy years. There are many ULIPs, more specifically online plans that are not levying any premium allocation charges also. Premium allocation charges may also vary depending on the premium type (single or regular) and mode of premium payments such as yearly, half-yearly, quarterly and monthly.

  1. Fund management charges:

    Fund management charges are levied as ULIP investments are made into various investment funds which need to be managed. Fund management charges are adjusted on a daily basis from net asset value (NAV) of the fund before arriving at it. The maximum fund management charges allowed for deduction is 1.35% per annum of the fund value. Fund management charges are usually more in equity funds than debt or balanced funds.

  1. Mortality charges:

    Basically, mortality charges are the cost of life insurance coverage under the ULIP plan. These charges may depend on various factors such as the amount of sum assured, age of the assured, health history and many more. Mortality charges are deducted on a monthly basis. Charges will be deducted proportionately from each fund you have chosen for investment by cancelling the units.

  1. Partial withdrawal charges:

    ULIP plans allow partial withdrawal of funds after the completion of the lock-in period of 5 years. Some of the policies will restrict the number of partial withdrawals to limited numbers such as 3 or 4. Some ULIP plans may allow unlimited partial withdrawals. However, after a limited number of withdrawals, ULIP plan may charge you for further withdrawals which are called partial withdrawal charges. Usually, partial withdrawal charges are flat fees.

  1. Switching charges:

    ULIP offers an excellent feature of fund switching. The plan allows you to switch from one investment fund to another depending on your investment need and market conditions. Generally, the number of switches allowed are limited to a certain number in some ULIP plans. Some plans may offer unlimited free switches. ULIP plans with limited switches charges you for additional fund switches that you make during the policy term. Switching charges may vary from INR 100 to INR 250 per switch depending on the ULIP plan or the insurance company.

  1. Premium redirection charges:

    Usually in a ULIP plan, in the beginning, you will choose a fund for your investment. And your further premiums are invested into the same funds. However, ULIP offers a feature called premium redirection wherein, you can redirect your future premium payments into a different fund. For example, you have chosen investment fund A and your future premiums can be redirected to fund B. Premium redirection can be done in limited numbers only. Premium redirection charges may vary from INR 100 to INR 250 per switch depending on the ULIP plan or the insurance company.

  1. Discontinuance charge:

    ULIPs come with a lock-in period of five years. If you discontinue premium payment within the lock-in period, your money will be locked in a discontinued fund. The same is applicable for the surrender of policy within the lock-in period also. These charges are pre-decided by IRDAI and are same almost cross all ULIP Plans.

  1. Policy administration charges:

    There are charges deducted to maintain your ULIP policy which is known as policy administration charges. Policy administration includes premium intimation, revival notice, documentation and many more. A flat amount is charges as policy administration charges.

  1. Miscellaneous charges:

    Miscellaneous charges in ULIP are of a smaller amount. This can be related to changing the premium payment mode or any other charges incurred.

ULIP Investment Myths Debunked

Let’s try to debunk certain myths relating to ULIP

Myth 1: ULIPs are high-cost products

Truth: ULIPs are not high-cost products, specifically after the change in regulations by the Insurance Regulatory and Development Authority of India (IRDAI) in 2010. The regulator has capped ULIP charges at 3% of gross yield for ULIP plans if the policyholder stays invested up to 10 years and 2.25% if the policyholder continues to stay invested for more than 10 years. Hence, the front load has reduced which mainly comprises of commission. Online ULIP plans are more cost-effective plans as the charges are relatively less.

Myth 2: ULIPs are high-risk investments as they are market-linked

Truth: ULIP offers you to select an investment fund based on your risk appetite. There are various investment funds offered by ULIP comprising of equity funds, debt fund and balanced funds or combination of all of these funds. Many ULIP plans offer eight to nine types of funds suitable for varying risk categories. ULIPs are suitable for conservative to aggressive investors.

Myth 3: ULIP is not a good investment choice

Truth: ULIP is an ideal investment option for all type of investors irrespective of their risk appetite and life phase. ULIPs are available for various long-term goals such as for retirement, child education and wealth creation etc. Depending on your risk profile, goal and purpose you can choose the investment fund. According to your changing needs, you can switch from one fund to another fund also. In short, ULIPs are excellent products to build wealth over long-run with the benefit of customisation, flexibility, transparency and many more such benefits.

Myth 4: ULIPs are illiquid as they are long-term products

Truth: ULIPs offer liquidity in the form of partial withdrawals after 5 years of the lock-in period. During an emergency, you can withdraw a part of ULIP funds to meet the urgent liquidity requirements.

Myth 5: ULIPs cannot be surrendered during the policy period

Truth: ULIP plan can be surrendered after completion of the lock-in period of five years. Before which if you discontinue, certain charges will be deducted and the fund amount will be parked in discontinuance fund and the payout will be made after completion of five years. However, to reap the benefit of your investment it is advisable to stay invested throughout the policy period. The benefit of compounding and the benefit of the change in the market cycle can be experienced only if you stay invested for long.

Myth 6: Life cover in ULIP is impacted by market volatility

Truth: Sum assured or life cover in ULIP plan is unchanged throughout the policy period irrespective of the market volatility. Though the performance of your investment is linked to the capital market, the life cover will remain unaffected by the market volatility.

Myth 7: ULIP does not allow investment of surplus funds

Truth: ULIPs offer the top-up facility wherein you can invest surplus funds over and above your regular premium investments that you are making into the policy. Tax benefit can also be enjoyed on the top-up investments that you make.

Frequently Asked Questions (FAQs)

  1. What are the eligibility conditions to invest in ULIP plans?

    To invest in ULIP plans you must meet the following eligibility requirement

    • You need to meet the entry age criteria (both minimum and maximum)
    • You need to meet the age criteria, which is below the maximum maturity age while exiting a ULIP plan.
    • You must adhere to the plan’s terms and conditions relating to premium payment mode and term.
  1. What are the documents required to invest in ULIP?

    Following are the documents required for investing in ULIP:

    • Identity proof: PAN card, Voter’s ID, Aadhaar card, passport etc
    • Address proof: Aadhaar Card, Voter’s ID, Passport, Driving license, utility bills
    • Income proof: Income tax returns, bank statements, salary slips
    • Age proof: Birth certificate, Aadhaar card, Passport, Driving license etc
  1. Can ULIP be revived after discontinuation of premium?

    Yes ULIP can be revived within a revival period which is usually two years from the date of last premium payment.

  1. Is there a grace period given for premium payments in ULIP?

    Yes. Usually, ULIPs provide 15 days to 30 days of grace period for making the premium payment.

  1. Can investment in ULIP plan be cancelled after buying?

    Yes. Investment in a ULIP plan can be cancelled within the free look period with the reason stated. Usually, 15 days to a maximum of 30 days are given as free look period during which you can cancel your investment in ULIP plan without charges if you are not satisfied with the terms and conditions of the policy. However, it can be done with reasons stated for rejection.

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