ULIPs are Unit Linked Insurance Plans which come with the dual benefit of Insurance combined with investments. ULIPs provide a flexibility to the policyholders to choose their investment fund as per their risk appetite. So, if you wish to invest in the Equity Market or in the Debt Market along with an Insurance Coverage, ULIP is the answer to your needs. It provides the best of both worlds.
What is ULIP?
ULIPs are life insurance plans which provide policyholders dual benefits of investment returns as well as life insurance coverage. The premiums paid under the plan are invested in the capital market. Thereafter, the premiums grow with the growth of the market. The invested premiums along with the growth they have earned reflect the Fund Value of the plan. If the insured dies during the term of the plan, higher of the Sum Assured or the Fund Value is paid. In case of maturity, the available Fund Value is paid and the plan is terminated.
Features of ULIPs
TULIPs have some salient features which put these plans in a different league of their own. These features include the following:
- The amount of premium payable depends on the policyholder. The policyholder can decide what amount of money he wants to invest in the plan. However, the plan has a minimum premium criterion. Any amount above the minimum premium limit can be paid as premium. In some ULIPs, there might be a maximum premium criterion as well. In that case, premiums exceeding the maximum amount are not accepted.
- The sum assured under the plan depends on the premium paid. It is usually expressed as a multiple of the annual premium paid by the policyholder.
- There are different funds provided by a unit linked plan. These funds are basically the following:
- Equity funds which invest primarily in equity oriented securities. These funds have high risk and promise high returns.
- Debt funds which invest primarily in fixed-income bearing instruments. The funds, therefore, have very low risks and low returns.
- Balanced funds which invest in a combination of equity and debt. Thus, there is moderate risk and moderate return under the funds.
- The premium which the policyholder pays is invested in the available funds. The policyholder can choose any one or more fund for investment.
- There are applicable charges which are deducted from the premium before it is invested. Some charges accrue monthly or daily which are then deducted from the Fund Value.
- There is a lock-in period of 5 years under the plan. After the lock-in period is over, the policyholder can withdraw funds from the Fund Value partially. This facility is called partial withdrawals.
- There is also a facility of switching in which the policyholder can change the funds.
- Additional premiums can also be paid under the plan through the facility of top-ups.
- Many ULIPs also promise guaranteed additions, loyalty additions or fund boosters over and above the market-linked returns. These additions enhance the fund value.
- There can be readymade investment strategies under some ULIP which, when chosen, invest the premium of the policyholder in a pre-determined pattern.
Types of ULIPs
There are different types of ULIPs which are available in the market. These include the following:
- Child ULIPs
Child ULIPs are children plans which are offered for creating a secured financial corpus for the child.
- Pension ULIPs
Pension ULIPs aim to create a substantial retirement fund by providing market-linked returns on the premiums invested.
- Endowment ULIPs
These are simple savings-oriented ULIPs which pay either a death benefit or a maturity benefit.
Why are ULIPs beneficial?
ULIPs provide various benefits over traditional insurance plans and other investment avenues. Some of these benefits include the following:
- They provide market-linked returns which help in wealth maximisation. They, thus, build up an inflation adjusted corpus.
- The benefits of partial withdrawals, top-ups and switching give ULIPs unmatched flexibility. It allows policyholders to manage and strategize their investment portfolio.
- In plans where readymade investment strategies are available, even amateur investors can get the benefit of market-linked returns without having to manage their portfolios themselves.
- ULIPs allow tax benefits. The premium paid for the plan is allowed as tax deduction under Section 80C up to a maximum of Rs.1.5 lakhs. The partial withdrawals made are tax-free. If the fund is switched, the switched amount also does not attract any taxes. Moreover, the maturity or death benefit paid under the plan is completely tax-free under Section 10 (10D) of the Income Tax Act.
- ULIPs provide an insurance cover along with investment returns. Thus, policyholders are secured of the sum assured even if they are not around.
- Child and pension ULIPs help policyholders not only earn investment returns but also fulfil their financial goals of child and retirement planning.
Difference between ULIPs, Mutual Funds and traditional Life Insurance Plans
Since ULIPs also provide market-linked returns like mutual funds, they are compared to mutual funds. However, mutual funds and ULIPs differ on the following parameters:
- ULIPs have a higher lock-in period of 5 years. In case of mutual funds lock-in period is applicable only for Equity Linked Savings Scheme where also the period is 3 years. Other mutual fund schemes do not have any lock-in period.
- ULIPs provide life insurance coverage which is distinctly absent in mutual funds.
- In ULIPs, when there is a fund switch, no tax is applicable. However, in case of mutual funds, when there is a fund change, taxes are applicable depending on the fund selected.
- The benefits under ULIPs are completely tax free. Mutual fund returns are taxable.
- Charges under ULIPs are slightly higher than charges under mutual funds.
Not just with mutual funds, ULIPs have striking differences with traditional life insurance plans too. These include the following:
- ULIPs show the charges and the growth in a transparent manner. This transparency is missing in traditional insurance plans.
- Liquidity is available under ULIPs which is not present in other insurance plans.
- The flexibility of switching and top-ups can only be found under ULIPs.
- The benefits under the plan are not guaranteed since they depend on the market movements. Traditional insurance plans guarantee both the maturity and the death benefit.
- Returns available under ULIPs may be higher as compared to those available under traditional plans since there is an option of choosing equity fund.
Things to know before investing in ULIPs
Before you invest in a unit linked plan, here are some things which you should know:
- The premiums paid are subject to charges which are deducted either before the premium is invested in the chosen fund as in the case of Premium Allocation Charges or deducted on a monthly basis like Policy Administration Charges, Mortality Charges, etc. or even on a daily basis as in the case of Fund Management Charges.
- Though switching and partial withdrawals are allowed, they might be chargeable above a specified limit.
- You can choose the sum assured multiple under the plan depending on your coverage requirements. However, higher the sum assured chosen, higher would be the mortality rate charged.
- There is a limit to the amount of partial withdrawals which can be done. If the limit is exceeded, the policy lapses and is surrendered.
- The premium paid is used to buy units in the fund selected. The units are bought at the existing Net Asset value (NAV) of the fund selected. The NAV is arrived at by dividing the total value of portfolio of the fund with the number of securities bought. A higher NAV means that the fund is growing and vice versa. The basic NAV usually starts at Rs.10.
Myths about ULIP investments
- Premiums are required only for a limited time
No, premiums are required for the premium payment term which the policyholder has selected. If a single premium ULIP is bought, only a single premium is required to be paid. For limited premium plans, premiums are payable for the specified limited period. But for regular premium plans, premiums are payable throughout the term of the policy.
- Partial withdrawals do not affect the death benefit
Under most plans, the death benefit is higher of the Sum Assured or the Fund Value. However, for arriving at the sum assured, partial withdrawals made in the preceding two years are usually deducted.
- The invested premium would double in three years
There is no guarantee to the returns provided under ULIPs. The returns solely depend on the capital market. If the market performs exceptionally well, the premiums might double otherwise there is no guarantee of such high returns.
- I can stop the plan after the first five years
The first five years are the lock-in period. Partial withdrawals are allowed after the first five years. Though the plan can also be surrendered after the first five years, it doesn’t mean that the plan has completed its tenure. It simply allows policyholders flexibility. If the plan is stopped after five years, policyholders lose the benefit of higher returns which are available if they stay invested.
ULIP calculator – what it is and how to use
There are online ULIP calculators which help in calculating the expected Fund Value. The policyholder would just have to enter the amount of premium he wants to pay, the sum assured and the chosen tenure. The calculator then calculates the expected Fund Value at two rates of return – 6% and 10%. An illustration is shown which shows the premium paid, the charges deducted and the growth available under the Fund Value. The calculator thus shows the expected returns from the unit linked plan.
Best unit linked plans in India
Here is a list of some of the best unit linked plans available in the market:
|Name of the plan
|Minimum premium required
|HDFC Life Click2Invest Plan
|Single premium – Rs.24,000Annual premium – Rs.12,000
|Eight funds are available for investmentThe plans can be bought onlineThere are no premium allocation or policy administration charges levied under the plan
|HDFC SL ProGrowth Super II
|Both sum assured and Fund Value are paid on deathEight coverage options are available under the planHassle-free purchase of the plan by filling a short medical questionnaire
|Bajaj Allianz Future Gain
|Two readymade investment strategies are availableOptional riders are available under the planTop-ups can be paid for increasing the investment
|Bajaj Allianz Life Goal Assure
|Mortality charges are returned when the plan maturesFour investment strategies are availableAdditional fund boosters are added on plan maturityLoyalty additions enhance the fund value
|ICICI Pru 1 Wealth Plan
|Single premium unit linked plan100% of the premium is invested without any allocation chargesWealth boosters enhance the fund valueSeven funds are available for investments
There are a number of free switches allowed in a policy year. Any exceeding switches would be chargeable.
The maximum limit on partial withdrawal depends on the plan. However, usually, under most plans, at least one annual premium should be left in the fund value after the partial withdrawal.
Settlement option is a feature which is available in most unit linked plans. Under the option, the maturity proceeds can be chosen to be taken in five equal instalments after maturity.
Yes, top-up premiums also carry a top-up sum assured and increase the coverage. The sum assured allowed for top-up premiums is, usually, 1.25 times the top-up premium paid if the insured is below 45 years of age and 1.10 times the top-up premium paid if the insured is 45 years and above.
Yes, the policy can be surrendered any time. However, the surrender value is paid only if the policy has completed the first five years.
No, ULIPs are market-linked products which do not participate in bonus declarations.
Premium redirection means redirecting future premiums to another fund than which has been selected by the policyholder. If the policyholder is investing in Fund A and then chooses premium redirection feature and chooses Fund B, future premiums paid would be credited to Fund B.
Yes, ULIPs have three tax benefits which make the plan a popular choice. The premiums paid for the plan are tax-free under Section 80C up to a maximum of INR 1.5 lakhs. The maturity or death benefit received is also tax free under Section 10 (10D). Moreover, if the policyholder chooses the switching feature, any amount switched to another fund would also be tax-free.
No, top-up premiums are allowed by most ULIPs but not all of them.
On maturity, the Fund Value is paid under most unit linked plans.
Under most ULIPs, the death benefit is higher of the available Fund Value or the chosen sum assured. Some ULIPs also allow both the Fund Value and the sum assured as death benefit.
Yes, ULIPs allow single premium payments too. There are many unit linked plans with such an option.
Yes, ULIPs allow policyholders various optional riders. The rider charge is deducted from the unit value.
No, since ULIPs allow partial withdrawals, policy loans are not allowed.
Lock-in period is the period when the policyholder is not allowed to withdraw money from his Fund Value. ULIPs have a lock-in period of 5 years.