ULIPS

What is a Unit-Linked Insurance Plan (ULIP)?

Are you looking at an insurance policy that not only provides protection but also works as your investment vehicle? Then a Unit Linked Insurance Plan or simply put an ULIP may be your answer. This is a product that combines both protection and investment. A part of the premium paid is used to provide protection to the policyholder. The balance is invested in equity and debt plans after deducting allocation charges. These may include charges for managing the funds and policy administration. The pool of premiums collected by the insurance company for providing such plans is invested in varying proportions of debt and equity securities (plans) like mutual funds. The proportion between debt and equity may vary from product to product.

A policyholder has the option to select different types of ULIPs depending on his investment need.   The investment needs can be in the form of retirement planning, medical expenses, children education, marriage or for wealth creation.

How does a ULIP work?

Each policyholder's Unit-Linked Insurance Plan holds a certain number of fund units. Each Unit has a net asset value (NAV) that is declared daily. The NAV is calculated based on the market value of the equity and debt securities and determines the returns of the product. Hence ULIPs have an element of market-linked risk involved. The investment plan in ULIPs is eligible for tax benefits up to a maximum amount of Rs. 1.5 lacs under Section 80C of the Income Tax Act.

Even the Maturity proceeds are exempt from Income Tax. However please note there is a caveat. The Sum Assured or the minimum death benefit must be at least 10 times the annual premium. If this condition is not met, the benefit under Section 80C shall be capped at 10% of Sum Assured while the maturity proceeds will not be exempt from Income Tax.

The maturity value of ULIPs will be the Sum Assured or the Fund Value, whichever is higher to the insured. Most ULIPs also provide you a facility of partial withdrawal subject to surrender charges This provides liquidity by letting you withdraw some of the money in case of unexpected expense such as sudden hospitalization, a business loss, an impulsive holiday etc. ULIPs also provide you the flexibility of switching between debt and equity several times without any cost. Certain ULIPs also provide you loyalty benefits on remaining invested for long term tenures.

Hence it is prudent to invest in these after a thorough assessment of your investment needs with the guidance and proper financial planning with a qualified financial advisor. A good advisor helps you compare different ULIPs by explaining you the different charges being levied by the insurance company, features and benefits of the plan. It may be a good idea to understand the performance of the plan for the last three to five years as well. 

Reasons why ULIPs plans are better than mutual funds

Don’t confuse a ULIP with a Mutual Fund. Yes, both provide similar benefits but look closely and there are a host of differences. Let us take you through to some of the key ones that can help make an informed decision.

There are several reasons an ULIP is better than a mutual fund. Some of them are -

1. Protection & investment plan – Like explained in the previous section, ULIPs can provide you the dual advantage of protection and investment. Unlike a mutual fund that provide you only with an investment opportunity. In addition to pure protection, ULIPs also offer critical illness cover and accidental benefits. However, the same cannot be purchased with mutual funds. This is because mutual funds are pure investment products.

2. Flexibility to switch allocation – ULIPs also provide you with the flexibility to switch from equity to debt and vice versa. No such switching option is available in Mutual Fund. The switch is not only possible in a ULIP, it also does not attract any capital gains tax. But that is not so in case of mutual funds. When you switch from an existing mutual fund investment to another, it will attract capital gains tax, irrespective of the fund’s type and the tenure of the investment plan.

3. Suitable for long term investment– ULIPs generally are meant to fulfil long term objectives as they also have an element of protection involved. Hence if you are looking at a longer tenure of investment plan, a ULIP is a better investment vehicle than a Mutual Fund.

4. Tax- Friendly – The premiums paid towards the ULIP plan is tax free up to Rs.1.5 lakh under the Section 80(C). In case of the unfortunate death, the cover amount paid to the nominee would also be tax-free under the Section 10(10 D). In case of a Mutual Fund, the tax benefit is obtained only in the case of investment under Section 80 C with an Equity Linked Savings Scheme (ELSS). With the recent introduction of Long term capital gain (LTCG) tax on equity, experts argue that ULIPs have become more lucrative as there is no tax on capital gains from ULIPs. Also since ULIPs do not distribute accumulated funds as dividends there is no dividend distribution tax unlike a Mutual Fund. Mutual Funds on the other hand attract a 10% Dividend Distribution Tax on the dividend paid by equity mutual fund schemes. The maturity benefits are tax free in the hands of the investor. In case of a mutual fund, the proceeds are taxable.

5. Loyalty Additions – ULIPs also provide a loyalty addition in case of  a long-term tenure of the policy by paying some additional units. No such additional units are generally allotted in a Mutual Fund. In a nutshell a ULIP can provide protection, more tax efficiency, greater flexibility between equity and debt allocation. They are hence suitable for a longer tenure.

Types of ULIPs

Every investment goal is unique. So, choose a plan that can help you achieve yours keeping in mind your risk appetite and time horizon. You can also opt for a balanced option that provides the best of both worlds. Basis the type of investment plan, ULIPs can be classified as:

Equity Fund or Growth Funds where majority of the portfolio consists of investments in shares/stocks and are suitable for investor with a high-risk appetite.

Debt Fund- Also called Bond Funds where the investments are primarily in government securities like gilts or corporate bonds. This is suitable for a more conservative investor.

Money Market Fund- This is also known as Cash Funds or Liquid Funds where investments are largely in short-term Money Market instruments like Treasury Bills, Commercial Paper etc. Invest in these in case you need the funds at a short notice.

Balanced Fund- Also known as hybrid funds, these offer a combination of mix of Equity and Debt Fund in different proportions

ULIPs can also be classified depending on whether you will receive the Sum Assured and /or Fund Value - Type 1 and Type 2 ULIPs.

In type 1 ULIP, the policy holder will receive either the sum assured or the fund value whichever is higher in case of the unfortunate death of the policy holder before the maturity of the policy.

In type 2 ULIP, one gets both in case of death before the maturity of the policy. However please note that the premium for Type 2 ULIP is generally higher.

Investor’s Financial Planning and Goals - This is the most important criteria of classification of ULIP:

ULIPs for retirement planning:You would want to continue the similar standard of living even post retirement from working life. Retirement brings an end to your regular income; therefore, these plans work by investing a portion of your income during your earning years, in a regular disciplined manner over a period. After the policy matures, you can withdraw a lump sum of the money accumulated. Post that you receive fixed regular pay-outs for the rest of your life.

ULIPs for child education:In case you are a parent, this ULIP is for you and focuses on catering to their needs at different stages of life. It aims to provide financial support for expenses related to your child’s future, such as education, marriage etc. Hence, this ULIP helps your children realize their dreams even if you are not around to support them.

ULIPs for wealth creation: A little extra wealth may help us achieve more in life and if you are the kind of person who wouldn’t mind a little extra wealth (Well who does not?), investing in one of these plans is the way to go. Choose from the different kinds of ULIPs for wealth creation and get a decent tax-free return on your investment plans.

ULIPs for health solutions:This is an extremely important, robust health plan that every individual must consider purchasing. These kinds of ULIPs will help you bear health related expenses and some might even fund your future health insurance charges.

 Now that you are well informed of the kinds of ULIPs available in the market, you can ask more detailed questions the next time you are being advised on which financial product to invest in. Above all, just remember to start now!

ULIP plans from Aegon Life

At Aegon Life, we have several ULIPs that you could choose from. These are for an investor with varying risk appetite and time horizon. Some of them are as follows:

·  iInvest Insurance Plan

iInvest is our online ULIP which offers a combination of protection and investment. We have designed it to offer a considerable degree of flexibility, making it well suited to the first-time investor and market expert alike. We invest 100% of the premium you pay, thereby helping maximise your investment amount. This ULIP allows you to manage your funds in any proportion. You may want to invest in six different funds, such as blue-chip equity, accelerator, and opportunity, stable, secure and debt funds. Each fund caters to different levels of risk from low to high. Among the six funds available, opportunity fund provides long-term wealth generation by allowing you to invest in mid-caps.

·  iMaximize Insurance Plan

In case you are looking a plan to secure your child’s future, this could be your answer. This  plan comes with ‘Triple Benefits’. Here, along with a higher sum assured, you also get additional savings and income benefit. Moreover, it ensures your child gets all the financial security after you. We have designed it to offer a considerable degree of flexibility, making it well suited to the first-time investor and market expert alike. This plan can also cater to your child’s needs in your absence through the Triple Benefit pay-out option, which provides financial relief in stages. No allocation charges mean you maximize the return from your investment plan as the full amount gets exposure to the fund of your choice.

·  iMaximize Single Premium Insurance Plan

This investment cum insurance plan needs you to invest only once, while you earn profitable returns on your investments for a long time to come. This plan also allows you to choose from six unit linked funds. You should choose this plan if –

  • Want to invest only once
  • Want to maximise your investment, because there is no premium allocation charge
  • Are also looking for tax saving in addition to an investment and insurance plan that will also help you save tax
  • Want to financially secure your family’s future

ULIPs charges you need to know about

 Would you not carefully select the tomatoes to decide which one goes in your vegetable basket? Or check the restaurant bill after a hearty meal? They why not study your policy document. There are many charges a ULIP plan deducts. Familiarise yourself with them so you can be assured of investing in the policy most appropriate to our needs.

  • Premium allocation charge: This is deducted from the premium upfront. It is a percentage of the premium towards charges before allocating the units under the policy. This charge is levied to recover the initial expense incurred towards issuing the policy such as the distribution fee and the cost of underwriting. The balance is used to purchase units of the funds chosen by the policyholder.
  • Policy administration charge: Towards the administrative expenses incurred by the company for maintenance of the policy. Which basically means that this is the costs towards the paperwork and is usually levied monthly. This charge could either be flat throughout the policy term or could increase at a pre-determined rate.
  • Fund management charge: Towards managing the fund, this charge is typically levied as a percentage of the value of assets. This fee is deducted before arriving at the net asset value, or NAV. As per the IRDA guidelines, life insurance companies cannot charge fund management fees more than 1.35% per annum. But do remember, that the fund management costs are levied on the accumulated amount, not just the premium paid. Which means that, in real terms, with time as the corpus grows, the actual amount deducted for fund management fee also increases.
  • Mortality charges: This monthly charge is providing you the insurance cover. When a policy is issued, the insurance company assumes the insured person will live to a certain age based on their current age, gender and health conditions. But just in the insured person doesn’t live to the assumed age, this is an expense for the insurance company.
  • Surrender charges or discontinuance charge: This charge may be deducted for premature encashment of units. The encashment can be either partial or full and is usually calculated as a percentage of the fund or of the annualised premiums. For this too, IRDA has laid down guidelines on the maximum surrender charges that can be levied by life insurance companies.

Here are 6 ULIP myths, we bust for you

There are many myths associated with ULIP that may confuse you to select a plan. Don’t believe on hearsay. Read along and clear your ULIP myths before you start investing in them –

Myth 1 - ULIPs are risky

Reality - Most consider ULIPs are risky as they only invest in the equity market. However, in an instrument such as this, you can choose the level of risk depending on your financial plan you wish to take by selecting funds with different objectives. At a younger age, you can choose an aggressive fund if you are a risk-taker or at an older age you may also settle for a conservative fund by selecting a debt-oriented fund. Alternatively, you can go for a balanced fund (i.e., a mix of equity and debt fund). In ULIPs, you also have the option to switch between funds based on your lifestyle and changing risk appetite. For example, during periods of volatility, you can move your investment from an aggressive or balanced fund to a debt/liquid fund.

Myth 2: ULIP has a lock-in period of 3 years

Reality – As per a revised regulation by IRDA in 2010, the lock-in period for ULIPs has changed from 3 years to 5 years. According to the new regulation, it favours people looking for a high sum assured, and low initial charges, promising higher returns due to investment in funds.

Myth 3: There are many charges, thus decreasing the actual money invested in a ULIP

Reality – ULIP did have multiple charges earlier. Out of the Rs. 100 invested, almost Rs.60-75 could have been allocated to charges. But the revised guidelines of IRDA, has ensured uniform division of charges over the five-year period instead of deducting all the charges in the first year itself. Consequentially, a good portion of the premium is invested right from the first year. Moreover, these fees or charges set by the IRDA are the maximum that the insurance company can charge, so you must compare different plans before buying ULIPs.

Myth 4: ULIP is expensive and not a liquid instrument in case of an emergency.

Reality – Since the charges have now been evenly distributed over the lock-in period of 5 years, the policyholder in an ULIP can now have an opportunity of having a higher amount invested initially. . If one considers an ULIP as a long-term investment vehicle that offers multiple options depending upon the goals of the individual, then it is not expensive at all.

Myth 5: Switching charges in ULIP are high.

Reality – This is not true. Switching funds in a ULIP is not chargeable. Many insurance companies offer good number of free switches in a year. Please check the number of available free switches among different ULIPs.

MYTH 6: ULIPs do not provide health and accident cover

Reality –ULIPs provide the dual advantage of insurance and investment. Along with pure protection, always check for rider options. The common ones are Accidental Death Benefit (ADB), Waiver of Premium (WOP), Family Income Benefit, Hospital Cash Benefit (HCB) etc.

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