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Unit Linked Insurance Plans(ULIP)

A very popular plan in an insurance company’s kitty is a ULIP. ULIP plans give an individual the freedom to explore the capital market for investments while at the same time bestowing the all-too-important risk coverage. At a time when the share market and mutual funds were dominating individual’s investment portfolios, ULIPs were launched by insurance companies to lure customers with the promise of high investment returns. Today, ULIPs have become popular among many investors as these plans provide the dual benefit of insurance cover and wealth maximization. So, let us understand the concept of ULIPs in details.

What is ULIP?

Unit Linked Insurance Plan or ULIP is an insurance product which offers risk coverage to the policy buyer along with introducing the buyer to investment opportunities in the capital market. It provides a platform for the buyer to invest in different types of investment instruments such as stocks, bonds as well as mutual funds. ULIP can be classified as a two-in-one plan which aims at offering investment and protection to investors, which are customised according to individual requirements. As a comprehensive plan, the investment and protection part can be managed according to specific buyer choices and needs.

Types of Investment Funds under ULIP Plans

  • Fixed Interest and Bond Funds: These kind of funds give returns in a timely manner. For Fixed returns, insurance companies invest in debt funds, corporate bonds, government securities, etc. The risk factor in these funds is slightly high than Cash Funds. These funds are a combination of secured and unsecured investments.

  • Cash Funds: Cash funds are considered to be the safest kind of investment. Cash funds are also known as money market funds through which the policyholder receives a set amount of returns upon maturity. These funds fall in the low-risk category.

  • Equity Funds: These funds primarily invest in equities and stocks of companies. Equity funds are considered the riskiest ULIP investment, but they tend to offer the highest rewards. So if you have a high risk taking appetite, you should surely invest in an equity fund.

  • Balanced Funds: One of the most stable and prudent investments, balanced funds vary the amount of investment that goes to different places. With the money paid through premiums, insurers invest in fixed component like corporate bonds and varied components like stock market. Balanced funds hence, fall in the medium-risk category.

ULIP Plans Classified on the Basis of Purpose

  • ULIP for Retirement: This plan requires you to pay the premium during the tenure of your employment. This amount is automatically collected as your corpus and is used to purchase an annuity post your retirement.

  • ULIP for Wealth Collection: People invest in this plan in order to accumulate wealth over a period of time. This is a highly recommended plan for millennials in their late twenties and early thirties, so that they have the flexibility to fund any future financial goal.

  • ULIP for Children Education: Some ULIP plans also support a child's education. These plans protect your child's future in any unforeseen situation by pooling in some chunk of money. This ensures that the key events in your child's life never face a financial crisis.

  • ULIPs for Health Benefits: In addition to the above, certain ULIP plans also assist in providing money in case of medical emergencies.

Types of ULIP Plans - Classification by Death Benefit

There are two types of ULIP plan based on death benefit

  • Types 1 ULIP Plans: Under Type-I ULIP, the nominee gets the higher of Sum Assured or Fund Value as a death benefit to the nominee. However, in case the assured dies in the initial years of the policy, when the fund value is lower than the sum assured, the insurer will pay the agreed sum to the assured's nominee. But when the fund's value is more than the sum assured, the death benefit is an accumulated amount in the fund.

  • Types 2 ULIP Plans: The nominee of the policyholder gets the sum of both i.e. Sum Assured and Fund Value in the event of demise of the policyholder. Usually, the insurance company charges extra for the added risk it assumes under the type II policy, from the policyholder.

Benefits of ULIP

  • Flexibility: ULIPs offer flexibility in the following ways:

    • It allows the investor to switch between funds and match his funding needs.

    • It allows the investor to make partial withdrawals; however, it may attract charges and is subject to certain terms and conditions.

    • It allows the investors to make single additions to their premiums and increase their investments at any point of time, through the facility of top-ups.

  • Transparent Structure: ULIPs allow you to keep track of your investment portfolio. They also intimate you of the percentage of premium that is invested along with the charges levied regularly. As an investor, you are also kept informed about the value and number of fund units that you hold.

  • Fund Option Can be Chosen: When choosing a Unit Linked Insurance Plan, one can decide the various fund options, based on the risk taking appetite. In case you wish to gain higher returns and have the capacity to take higher risks for the same, you can choose to invest in an equity fund. Hence, if you win, you earn big. However, if you wish to take lesser risk and are satisfied with medium to low, you can choose to invest in a debt fund. ULIPs also provide hybrid funds which suit an individual investor's needs.

  • Rider Options for Additional Coverage: Along with investment benefits, ULIPs also provide rider options for additional coverage to take care of your loved ones. With rider options such as accidental death rider, critical illness rider and term rider, you can rest assured that ULIPs not only take care of your insurance needs but are also beneficial for your family.

  • Tax Benefit: As ULIPs are life insurance products, they offer tax benefit in the form of tax-free maturity benefits and also on the death benefit and premiums paid.

How does a Unit Linked Plan work?

Here's how a Unit Linked Plan works. You pay the premium in a ULIP. Alongside, there are several other investors who pay the premium and invest in the same portfolio. The insurer further pools this money, deducts the expenses, and invests the balance money depending on the type of funds chosen. These funds can be invested in either equity, debt or balanced funds.

This total corpus is further divided into units with a certain face value. The insurer allocates 'Units' to each investor in proportion to the invested money. This units value is termed as 'NAV' or Net Asset Value. Every insurer has a fund manager to keep a track of the invested funds. Based on market performance, the units NAV either increase or decrease, resulting in a higher or a lower NAV.

On the maturity of the ULIP, the insurer pays you the fund value depending on the market value. In case of any unforeseen situation like death, the insurer pays your nominee the higher of the sum assured or the available fund value.

Best ULIPs in India in 2018

While there are several ULIPs available in the market, certain plans stand out because of the benefits they provide for insurance and investment purposes. A few of them are

Plan NameEntry AgeMinimum PremiumPlan Description
HDFC Life Click2Invest0 to 65 yearsRs. 1000 to 24000HDFC Click to invest is a non-participating unit linked insurance plan that offers life insurance by HDFC Life. In this policy, the investment risk in investment portfolio is borne by the policyholder. The benefit of investing in this plan is that you get to choose from almost 8 fund options, have multiple premium payment options and the flexibility to choose your policy term.
Bajaj Allianz Future Gain1yr to 60 yearsRs. 2500 to 25000Bajaj Allianz Future gain is a ULIP that helps you achieve your life goals by gaining maximum benefits at a nominal cost. You can choose from 7 funds to invest in and enjoy unlimited free switches between funds to optimise your investment.
ICICI Prudential Life time Classic0 to 65 yearsRs. 30000 to 50000ICICI Prudential Life time Classic is a non-participating unit linked plan that lets you protect your loved ones by providing a life cover, creating wealth and saving for the future. The plan lets you select between 4 portfolio strategies based on your personal investment needs.
PNB Metlife Smart Platinum7yrs to 70 yearsRs. 30000 to 60000This is a ULIP that lets you build your investment portfolio with the help 6 different funds. The plan offers coverage till 99 years of age with an option to choose a premium term of 5 years, 10 years of your entire lifespan.
Max Life Fast Track Growth Fund18yrs to 50 yearsRs. 25000 to 100000With investment flexibility, Max Life Fast Track Growth Fund, aims to provide insurance options with a simple and safe approach to invest with multiple fund options in the market. The plan has 6 fund options, offers withdrawal benefits and tax benefits to the investor.

How to Choose a ULIP?

  • Policy Term Flexibility: Most Unit Linked Insurance Plans are long term and hence have a lock in period. Hence, before you invest, you must ask yourself- how long do you want your money to be invested in a policy? Based on the duration, you can choose from a number of ULIP Plans. Once invested, all ULIP plans have a five year of lock-in period.

  • Investment Flexibility: ULIPs also allow you to choose the investment options before you select a plan. According to your risk bearing capacity, a buyer can choose to invest in equity, debt or a hybrid plan respectively.

  • Based on Personal Investment Goals: Before you wish to invest in a ULIP, it is imperative to define your long term financial goals. More than anything, your long term goals should align with your ULIP investment so that you invest in the correct kind of plan.

  • Compare ULIP Offerings: Choosing the best ULIP plan is easier with the help of comparing tool. Use these platforms to compare different unit linked insurance plans online.

ULIP Riders

The various types of riders offered are as following:

Accidental Death and Permanent Disability Benefit Rider

If the life assured dies due to an accident during the policy duration, the life insurance company pays base plan sum assured plus the rider benefit to the nominee. This rider is basically to provide a supplementary coverage to the life assured’s loved ones. However, an accident may not necessarily result in the death of the victim, but leave the victim permanently disabled due to the loss of hands, legs, or both. This may result in a victim being a handicap or cripple. Consequently, the life assured won’t be able to work, earn money and pay the premium. In such a case, the life assured with an accidental total and permanent disability rider gets the rider cover.

Critical Illness Rider

Critical illnesses like cancer, heart attack, kidney failure, coronary artery bypass, paralysis, etc. are sometimes fatal, leaving the suffer unable to work further. Moreover, the treatment of such an illness is expensive. With a Critical Illness Rider on your side, all these expenses are compensated with a lump sum benefit given by the insurance company. The payout is made when the life assured is first diagnosed with any of the critical illnesses as mentioned in the policy document.

Term Rider

This type of rider offers a lump sum or monthly income to the nominee of the life assured, in case death of the life assured during the term of the policy. This is especially beneficial when the life assured was the only bread earner of the family. Term rider gives a stipulated amount every month to ensure that the assured’s loved ones are taken care of and monthly inflow of income continues to support everyday needs.

Waiver of Premium

Due to death (policyholder and insured are different), accidental permanent disability or critical illness, your earning potential is hampered, and income comes to a standstill. Consequently, you are incapable of paying premiums for the rest of the term. If you stop paying the premium, your policy terminates. Once the policy terminates, one cannot claim, which means there’s no maturity or death benefit. But with the waiver of premium rider, your premiums are waived off in the event of disability or critical illness during the term of your premium. Your policy continues with all benefits intact.

ULIPs vs Mutual Funds

The difference between ULIP and Mutual Funds is displayed below:

Type of productInsurance + Investment.Only Investment(no life coverage)
Tax-savingsPremiums paid towards the plan up to Rs.1.5 lakh are eligible for tax deduction under the Section 80(C). The sum assured paid on death or the maturity benefit is also tax-free under the section 10(10D).Only ELSS based investments are eligible for tax deductions up to Rs.1.5 lakh under the Section 80(C).
InvestmentPart insurance – life cover and part invested in equity, hybrid, debts, bonds, equity, etc.Pure Investment.
InsuranceLife cover is providedNo Life Cover
RidersOption to get comprehensive and complete protection by adding ridersNot Applicable
ReturnsChances of moderate to high returns Net Asset Value (NAV) depends on the type of investment funds and on the performance of the market.Chances of high returns. Equity-oriented investment gives high returns. Depends on the allocation of funds and market performance.
LiquidityNeed to wait until completion of the lock-in period i.e. 5 years before exit.More liquid, except with ELSS which have a lock-in period of 3 years.
When to consider buyingWhen you want to provide financial security, and at the same time ready to accept investment risk.When you have disposal money and wish to gain high returns.
TenureDepends on the investor but for good returns on investment – 10 to 15 years.No specified tenure
Ideal TermLong term.Can be short, medium or long term.
Ideal Time to buyCan be bought anytime depending on the requirement and the amount one wishes to save.When one has lesser financial burden and have disposable money.
Switching OptionsFlexibility in switching fund allocations.No switching option
Lock-in Period5 yearsMost of the mutual funds typically do not have any lock-in period, except ELSS which have a lock-in period of 3 years. You can buy and sell mutual funds anytime, closed funds.
SecurityInvestment Risk borne by InvestorInvestment Risk borne by Investor
Fund Management ChargesHigher in the initial years up to 5 years, and later on, 1.35%Charges are 2.5%

Eligibility Criteria and Documents Required for Unit Linked Plan

  • One must meet the entry age criteria as mentioned in the policy wordings before purchase.
  • One cannot extend beyond the maximum age allowed under a ULIP plan. To exit you must be below the maximum age mentioned in the ULIP plan.
  • You must adhere to the plan's premium payment term and mode.

Documents Required to Buy ULIP

  • Income proof - Salary slips, income tax returns, bank statement, etc.
  • Address proof – Driving License, Aadhar card, Voting card, passport, etc,
  • Id proof - PAN card, Aadhar card, voting card, etc.
  • Age proof - Aadhar card, voting card, passport, driving license, etc.

Why should you buy ULIP?

  • Dual Benefit: A Unit Linked insurance Plan is one of a kind Life Insurance plan where a policyholder has the dual benefit of investment as well as life cover.

  • Systematic Savings: Some people often tend to postpone saving for major future needs like child's college education, future mortgage payments or even retirement funds. This can be avoided by buying a Unit Linked Plan which ensures that you save systematically for your future needs.

  • Tax Benefits: ULIPs are a superb combination of returns and protection. They offer tax exemption under Section 80C and 10(10D) of the Income Tax Act, 1961.

  • Choose the type of Fund: Not everyone is willing to take a risk with their hard earned money, this is where a ULIP is the best option to choose as a Life cover. Depending on the financial needs and risk appetite a policyholder can choose to invest in cash funds, equity, balanced funds etc.

  • Freedom to switch between Funds: Depending on the constantly changing life situations and financial needs, the risk appetite of a person may also change. ULIP offers the freedom to switch between types of funds in such situations.

Frequently Asked Questions

What is the meaning of ULIP?

ULIP is Unit Linked Insurance Plan, a market linked product that provides the benefit of insurance and investment under one comprehensive plan. A plan linked to the capital market, ULIP offers flexibility to invest in debt or equity based in the risk appetite of the investor.

What tax benefit is offered under a ULIP?

ULIPs offer tax benefits at the time of investment and on maturity of the policy. Money invested in ULIP can be claimed as a deduction under section 80C (life insurance) or 80CCC (pension). A maximum of Rs. 1,50,000 is allowed under section 80C/ 80CCC. You can obviously invest a higher amount, but the deduction will be limited to Rs. 1,50,000.

What is the NAV of ULIP?

NAV of net asset value of a unit linked insurance plan is the total value of its holdings net of admissible expenses. It is calculated by adding the ULIP’s holding on a specific day and deducting all liabilities like management fees, marketing expenses, operating expenses and other permissible expenses and charges.

What is the meaning of sum assured in ULIP?

Sum assured in ULIP is the minimum amount under death benefit which a nominee receives in case of death of the assured within the term of the policy.

What is the Maturity Benefit of a ULIP?

The amount of money which you will receive at the Maturity of your ULIP is called the Maturity Benefit of your policy. The Maturity benefit is calculated as the value of funds you choose to invest in.

How can I track my Fund Value?

To keep a track of your total Fund Value you need to know the Net Asset value of your funds. This NAV is determined everyday based on the market changes. Insurance companies publish an update for these values regularly.

If I am not happy with the returns, can I surrender my ULIP?

Yes, it is possible to surrender the policy by paying Surrender Charges after 5 years of lock-in period. But it is advisable to continue with the policy as in the initial years the policy may not yield higher returns due to Allocation Charges.

Can I borrow a loan against my ULIP?

Earlier it was possible to borrow loans against a Unit Linked Insurance Plan but according to new IRDA rule this is not an option anymore. Since ULIPs have an option of Partial Withdrawals, policyholders can withdraw some amount from their ULIP without asking for a loan.

How is the Death Benefit in ULIP calculated?

Based on the highest amount of Fund Value, Sum Assured or a Percentage of the paid premiums, the beneficiaries will be paid with the Death Benefit at the time of the policyholder's death.

What is the difference between death benefit and maturity benefit?

Unit linked insurance plans generally provide two kinds of benefits – maturity and death benefits. Maturity benefits are paid out by the insurance company when the policy has completed its full tenure and the policyholder survives the term. However, to receive this benefit, the insured individual must ensure that all premiums are paid on time. Once the policy has reached its maturity, the individual will receive the value of the fund, along with the loyalty benefits, if any.

Death benefits are paid out to the nominee(s) in the event the life assured passes away during the term of the policy. The nominee(s) stands to receive any one of these in the form of death benefits: i) sum assured or ii) sum assured or fund value, whichever is higher or iii) sum assured and the value of the fund, depending on the terms associated with the policy. The proceeds received in case of maturity of the policy or on the death of the life assured are tax-free under Section 10(10D) of the Income Tax Act, 1961.

What are the various riders? (Premium waiver, Income benefit, Critical Illness)

Riders are the additional benefits that can be included to ULIPs. It is an efficient way of customizing the ULIP to match the present and future needs of the policyholder.

Here is a list of riders that can be added to ULIPs:

Premium waiver rider – This rider waives off all the future premiums payable under the policy in case the proposer is unable to pay the premiums due to the occurrence of any unexpected events like death, accidental permanent total disability or diagnosis of critical illness.

Income benefit rider - In case of the demise of the policyholder, a monthly death benefit amount, which usually equals to 1% of the rider sum assured, would be paid for a specified period, as mentioned in the policy documents.

Critical illness rider - On first diagnosis of any one of the specified critical illnesses, a lump sum benefit will be paid out to the life assured. The number and type of ailments covered will vary from policy to policy.

Accidental death benefit rider - In the event of death due to an accident, the rider sum assured will be paid. This is over and above the standard benefit payable from ULIP. The death of the individual should be a direct result of the accident and within a certain timeframe of the date of the accident.

What is the tax treatment of investment plans?

The tax angle on ULIPs have made it an extremely popular choice among most investors. Tax deduction can be claimed on the premiums paid up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act, 1961.

Maturity proceeds from ULIPs are tax free under Section 10(10D) of the Income Tax Act, 1961, provided that the annual premium paid is less than 10% of the sum assured for policies issued after 1st April, 2012. Death benefits payable to the nominee(s) in the event of the death of the life assured are tax free and does not attract any tax liability. If top-ups are included and premiums do not exceed 10% of the sum assured, tax benefits can be claimed on the top-ups under both Section 80C and 10(10D) of the Income Tax Act.

Are investment plans risk free?

ULIPs give investors the dual benefit of insurance and investment. Part of the premiums paid go towards insurance and the balance is invested in a fund of the policyholder's choice. The policyholder is given the option to invest in any number of qualified investments like stocks, bonds or mutual funds. Although ULIPs are largely an insurance tool, there are risks involved owing to the element of capital market investment. Under ULIPs, the investment risk is borne by the policyholder and not by the insurance company. Equity funds are recommended for individuals with a high risk appetite and whose aim is capital appreciation. Debt income funds are more suitable for individuals who only want exposure to low risk, and whose aim is capital preservation. Finally, balanced funds are an appropriate choice for those willing to take on medium-high risk and want moderate level of capital appreciation.

Can I withdraw my investments?

One of the biggest perks of ULIPs is its partial withdrawal feature. ULIPs give policyholder the flexibility to partially withdraw some amount from the accumulated Fund Value before the end of the policy term. The partial withdrawal facility can only be availed after the policy has completed its lock-in period, which is 5 years. While there are no rules on how much a policyholder can withdraw, every policy will have its own specific limit and this will vary from insurer to insurer, policy to policy. It must be noted that a policyholder cannot withdraw the entire amount from the fund without surrendering the policy.

What do we mean by lock in period?

A lock-in period is a period of time wherein the policyholder of a ULIP cannot liquidate nor make any withdrawals from his or her policy. If one wishes to discontinue the policy during the lock-in period, the insurance company will move the fund value to discontinued fund, after applying a surrender charge. The funds will only be paid back once the lock-in period is complete. The Insurance Regulatory and Development Authority of India has raised the lock-in period for ULIPs to 5 years on September 2010 from the earlier lock-in period of 3 years to promote long-term saving habits among investors and weed out mis-selling.

What are the various charges in a ULIP Plan? Do all plans have the same charges?

ULIP offered by different insurance companies have varying charges. While the structure of charges differs across insurance companies they have a maximum cap on it as per the guidelines issued by IRDAI applicable to all insurers, but broadly here are the different kinds of fees levied on ULIPs:

Premium Allocation Charge - Premium allocation charge is deducted upfront from the premium. This is levied as a fixed percentage of the premium, prior to allocating the units under the policy.

Fund Management Charge – Insurance companies levy fund management charges for managing various funds in a ULIP. It is deducted before arriving at the net asset value.

Mortality Charges - Mortality expenses are charged on the insurance component. When a policy is issued, the insurance company assumes that the life assured will at least live to a specific age. The mortality charge compensates the provider, in case the individual does not live to the assumed age.

Policy Administration Charge - As the name suggests, policy administration charges are levied for the administration of the policy. It is charged on a monthly basis.

Partial Withdrawal Charge - After the policy has completed its lock-in period, policyholder can avail the partial withdrawal facility. Such withdrawals may be free up to a certain limit and then the insurance company may levy a fee per withdrawal.

Fund Switching Charge - A policyholder is allowed a limited number of free switches between different fund options. With subsequent switches, charges may be imposed according to the insurance company's charge structure.

Discontinuance charge - If the policyholder stops premium payments before the lock-in period is complete, his or her money will be transferred to a Discontinuance Policy Fund, after discontinuance charge is deducted in the policy.

Premium Redirection Charge - Premium redirection refers to redirecting future premiums payments into another fund option. After a policyholder has exhausted the limit on the number of times he or she can redirect premium payments for free, charges will be levied.

What is fund switching in ULIP?

To safeguard the policyholder's returns from market volatility, ULIPs offer a variety of options – fund switching facility being one of them. Policyholders can move their investments between different asset classes like equity, debt and balanced, as per their risk appetite and financial goals of the policyholder. Units can be transferred partially or completely into different fund options. Some insurance companies allow unlimited switch options, while others have a limit of 5 to 10 switches in a policy year. To generate good returns on investments from the switch, the policyholder needs to constantly review and monitor his or her plan’s NAV, given that the market conditions change frequently.

Impact of LTCG Tax

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Which is a low-cost ULIP that can only be bought online?

ULIPs are insurance cum investment plans that provide risk cover for the policyholder, along with investment options to park funds in stocks, bonds or mutual funds. Online investment plans like HDFC Life Click2Invest, SBI Life - eWealth Insurance and Max Life Online Savings Plan are some great options that individuals looking for ULIP schemes can consider. The charges associated with these investment plans are easy on the pocket and can be availed anytime over the web. Investors are advised to consider some of the recently launched ULIP as they fare better than the older ULIPs on account of the lower charges.

How to revive lapsed ULIP?

A policy is regarded as lapsed when an individual fails to make premium payments, not just by the due date, but even during the grace period. A unit-linked insurance plan (ULIP plan) lapses when one skips paying the premium in the first 5 years, or during the lock-in period. The money is then moved to the discontinuance fund and a discontinuance charge is levied. To revive a lapsed ULIP plan, insurance companies generally give a window of at least 2 years. If an individual chooses to revive a lapsed ULIP plan during this period, then discontinuance charges levied upon revival will be reversed.

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