ULIP Plan

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

The earlier you start, the money gets a longer time period for growing. A longer time period of investment beats market volatility and yields good returns.

Yes, NRIs can invest in ULIP schemes

No, it does not come under LTCG

Yes, it is one of the best selling plans

One must start investing at the earliest possible to get the best returns from ULIPs.

No, the surrender value of ULIP is not taxable.

Absolute return is the return that a ULIP achieves over a period of time.

A Systematic Investment Plan is a mode of investment in mutual funds while a ULIP is an independent investment plan.

The total fund value in a ULIP is the prevailing price of the ULIP plan i.e. NAV multiplied by the total no. of units available in the policyholders account.

These charges are levied before the premium is paid by the investor. They are the initial charges imposed by the company.

ULIP plans offered by LIC are similar to the ones currently available in the market. At the time being no ULIP Plans are available for purchase from LIC.

The first ULIP was launched in India during 1971 by Unit Trust of India.

This is the fund value payable to the policyholder when the policy reaches the date of maturity.

United Linked Insurance plans or ULIP is a combination of investment and insurance. In this plan, the policyholder has the option to pay premium on monthly, quarterly, half-yearly or annually or even as a lumpsum. While a certain amount of the premium goes to provide life cover, the rest of the amount is invested, similar to a mutual fund. The different types of funds ULIPs offer are-

1) Cash/debt Funds (Low risk) – Often known as Money Market Funds, these funds invest in cash, bank deposits and money market instruments 2) Income, Fixed Interest and Bond Funds (Medium risk) – These funds have medium risk and invest in corporate bonds, government securities and other fixed income instruments 3) Equity Funds (Medium to High risk) – These primarily invest in company stocks with the primitive aim of capital appreciation 4) Balanced Funds (Medium risk) – These funds are a combination of investment in equity and fixed interest instruments

In Unit Linked Insurance plans, a number of investors pool money together to make one large investment sum. This amount is then invested in numerous capital market instruments. In order to enable the company to divide the returns amongst the investors in a proper manner, the fund manager divides the total investment corpus into smaller units which have a particular face value. The formula used to calculate the NAV is as follows:

NAV = (Value of Current Assets + Market Value of Investments Held) - (Value of Current Liabilities & Provisions) / Total number of outstanding units on date

ULIP is considered a good investment product as the premium can be either be paid monthly, quarterly, half-yearly or annually or even as a lump sum. Also, ULIPs have the potential to fetch better returns as compared to any other insurance product because they have an equity advantage over others traditional investment options. Moreover, ULIPs invest the premium paid by the investor in numerous asset classes through various funds.

ULIPs have a mandatory lock-in period of 5 years. You can only withdraw from a ULIP post the 5 year time period. The various charges levied as a fee under a ULIP scheme are:

1. Fund Management Charges
2. Policy Administrative Charges
3. Premium Allocation Charges
4. Surrender Charges
5. Morality Charges
6. Fund Switching Charges
7. Discontinuance Charges

Flexibility

ULIPs offer flexibility in the following ways

1. It allows the investor to switch between funds and match his risk needs.
2. It allows the investor to make partial withdrawals; however, it may attract charges and is subject to certain terms and conditions.
3. It allows the investor to make single lump-sum additions to their premiums and increase their investments at any point of time, through the facility of top-ups.

Market Linked Returns

ULIPs offer more than 6-7 types of investment funds to select from. Some of these funds are equity based which offer good market linked returns and increase the overall returns derived from a ULIP.

Investment with Life Protection

A ULIP offers the dual advantage of life cover and investment. Not only are you secured, but you also have the option to gain higher returns and build wealth.

Funds for Crucial Milestones in Life

Being an investment cum insurance plan with a long term investment horizon, a ULIP can be bought for meeting the expenses arising out of important milestones in life such as marriage, college education, etc. So, if you have a long term goal for yourself or your family, a ULIP is a good investment plan.

Protecting your Child’s Future

In case of an unforeseen event which leads to your demise, the ULIP will provide guaranteed death benefit to your wife and child. Thus, your child’s future will not get affected in your absence.

Financial Security Post Retirement

Retirement is an essential stage of every individual’s life. Over the period of investment, a ULIP scheme will gather enough corpus which can be utilised to live a stress-free life post retirement

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.

Choose your Investment Mix

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 returns, 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/Deductions

As ULIPs are life insurance products, they offer tax benefit in the form of deductions of premium amount up to Rs. 1.5 Lakh from ones taxable income and tax-free maturity or death benefit paid.

Investors across Different Life Stages

ULIPs are suitable for all stages of life irrelevant of young or old age or married or married with children and so on. Each and every individual can invest through ULIPs

People at varying risk types Your capacity for risk can determine the type of fund options under a ULIP scheme. If you have a high appetite for risk, you can switch to equity based investment fund which offer higher returns. For low risk appetite, you can invest in bond based funds. If you are looking at moderate risk, you can invest in hybrid funds.

Hands on Investors It is not necessary for a person to be a hands-on investor for making an investment through ULIP. If you do not know much about ULIPs, the professional investment strategy provided by the insurer can take care of your investment needs.

People with Medium to Long Term Investment Horizon LIP is the best option for everyone looking for options which have an investment horizon of medium to long term investment horizon. When equity investments are given the required time frame, they can provide the best returns among the various investment plans available.