Life insurance policies are in simpler terms, agreement, or contract with a firm, or a life company called an insurance provider. These policies require regular payments that are also known as premiums. These premiums are paid for a stipulated period of investment, which ranges from a few years to the death of a person. Hence, Unit Linked Insurance Plans(ULIPs) are a type of insurance policy with investment options. Lets read about it in detail.
Types Of Life Insurance
Life insurances are also of two types:
i. Terms Life Insurance: That goes on till a fixed term, like 5, 10, or 15 years.
ii. Whole Life Insurance: This achieves maturity when the person who invests dies.
A Brief On ULIP
ULIPS comes in both these categories, i.e., they can be long-lasting or short term.
Though you can’t term the ULIP under mutual funds for mutual funds are pure investment schemes. Also, ULIP is a mixture of insurance with investment. Hence, both are different. You can serve two goals in one in ULIPs. This is the main aspect of this scheme.
This scheme was implemented in 1971 and, since then, has gathered many users. The very first ULIP was the work of Unit Trust India (UTI). Thereafter, it was incorporated later in 1989 by Life Insurance Corporation (LIC).
Before you think about investing in this scheme, you need to consider the features of the ULIP. Given below are some of the points you should consider.
Working Of Unit Linked Insurance Plans (ULIPs):
The ULIPs are a combination of a life policy along with an investment stipulation in the form of mutual funds. Hence, two big goals of a person can be fulfilled in a single policy. To initiate this scheme, one has to visit an insurance provider. After your investment is made, it can be classified into two: one for the insurance part and the other investment bit.
The investment is in the mutual funds. Since there are many mutual funds, the investment can be made into any fund. These kinds might include equity, debt, hybrid, or any other type. All are included in the investment category. Also, fund managers can be appointed in case you want the best outcome from investment.
Once you apply for this scheme, as described above, a part of it will be invested into mutual funds. In case of maturity, your whole profit and aggregate are calculated, and then, you receive the fund you chose the scheme for.
In case of your misfortunate demise, your nominee at the time of process initiation receives the higher of :
i. The value of the fund.
ii. The sum that got assured.
iii. 105% of the premiums which have been paid until the demise of the person. The amount one receives after death also depends if the policy chosen is of Type 1 or Type 2 ULIP.
After deciding to invest, a person needs to pay a certain fixed amount termed as premium for a fixed time interval. Immediately after, the money is put to investment and covers insurance you. Of course, as mentioned above, you will be allowed to choose a single option between equity, balance, or debt funds. Thereafter, you can also jump between all types of investment options.
The grace period amounts to 15 days for monthly premiums paid whereas it’s 30 days in every other case. Also, in the case of discontinuation in the policy, one has around 2 years to pick up where he or she left. This is a very beneficial aspect of this investment. If you are thinking about withdrawing the money, it is allowed partially.
But, if the withdrawal is in the name of a child, one has to wait until the child is at least 18 years of age to withdraw the money invested. NAV is also applicable here. If the request for redemption or the premium is received before 3 P.M., then the same day, NAV will be applicable, or else, it will be converted to the next day.
Also, the involvement of fund managers gives great relief to those who don’t have the required knowledge of the whole process and market. You can choose the equity or the debt type of investment following your needs. This depends upon the amount of risk you can get accustomed to. This also depends on the knowledge you have of the current trends in the market.
Types Of ULIPs:
There are many types of ULIPs and they are classified on the basis of the following points :
i. Investment In Funds
Equity Funds: The premium payment is invested in the market linked to equity, and therefore it is subject to high risks for the investor.
Balanced Funds: The premium that has been invested and applied to the balanced mutual fund to reduce the market risk.
Debt Funds: The premium has been initiated in the debt mutual funds that are very much safer for investors. This is, therefore good for newcomers.
ii. End-Use Of The Funds
Planning Your Retirement: This type of ULIP is initiated to plan the early stages of the retirement of a citizen.
Education Of Your Child: In case you seek to invest to save, protect, and secure your child’s future then, you will apply for this kind of ULIP.
Creation Of Wealth and Property: You can take up this kind of investment to secure and develop wealth and property for yourself.
iii. Benefits Provided To The Holders Of The Policy :
Type one ULIP: In this type of policy, the higher of the fund value or the assured amount value is paid to the nominee in the case of the demise of the account holder.
Type two ULIP: In this type of policy, the assured amount value is payable along with the fund value, to the nominee or the beneficiary in case of the demise of the holder.
Lock-in Period :
The lock-in period of the ULIP is a minimum of 5 years. The IRDAI or the Insurance Regulatory and Development Authority of India brought a huge change in the year 2010. The minimum period was increased from 3 years to 5 years for this scheme. Also, since this scheme is in combination with insurance, too, its maturity can be extended up to 15 years.
The lock-in period can be 10-15 years since investor benefits in the longer run. Therefore, it is very beneficial for any investor. The IRDAI considered this change to increase the returns that are enjoyed by the investors. The past few years have seen an increase in the number of customers investing in the said policy. Hence, the government has promoted this policy as a long-term saver and a protection tool.
The Costs Related To Unit Linked Insurance Plans (ULIPs):
In the case of Unit Linked Insurance Plans, the various charges that are a part of the whole process include :
i. Premium Allocation Charge :
During the initial steps of your investment, this is deducted. This is charged at a very high rate and includes commission fees too. Also, some initial and certain renewal expenses are also included in this transaction. One of the significant aspects of this expense is that it is upfront deducted from the premium you pay. In short, these charges are for the seller for selling and underwriting the said product under your name.
ii. Fund Management Charges :
For proper management of various funds under the ULIP, the insurance companies levy such charges. The deduction occurs before the arrival of your NAV figures and is implemented for the purpose mentioned above. The maximum charge is set at 1.35 % annually of the fund value. This is charged daily and maximum charges occur in equity funds, whereas on non-equity funds, they are lower.
iii. Mortality Charges :
This covers the inclusion of insurance under the policy. Since this policy is a combination of insurance and investment, such charges apply. The rate depends upon various factors, including the age of the investor, principal amount, etc. Various factors like the person’s age, health conditions, amount, and duration of the investment in the life policy all affect the mortality charges.
iv. Partial Withdrawal Charge :
You can withdraw your investment partially too. This is possible in the stipulations of the policy but, penalties occur. You will be liable to pay charges if you choose this option. Also, many plans do not have a limit to the number of partial withdrawals you make but, some restrict it to 3-4 withdrawals. Based upon your earlier transactions, these withdrawals can also be free of any charges. But, this depends on the situation.
v. Charges Deducted When Switching Your Funds :
The movement of funds or your investment between various options presented is acknowledgeable as switching. According to the stipulations, you can switch up to a certain number of times in a year. But the catch is, you need to pay a certain amount, which ranges from Rs 100- Rs 250 per switch.
vi. Policy Administration Charges :
The insurer levies these charges for all the administrative work and management of your assets. Deduction occurs on a monthly basis by canceling all the units. These units come under all the chosen funds. This charge is applicable as a fixed percentage or as a fixed portion of your initial investment.
Goal And Benefits Of ULIP
The goals and benefits of ULIP are given below:
1. Insurance :
You have the golden and wise opportunity to provide protection to your family in case of any emergency. People want insurance for any unforeseen circumstance. Hence, this policy covers this aspect of life and serves the goal of the security of the family of a person. In case of the untimely demise of the person, the family is very well taken care of.
2. Financial Goals :
The other benefit of ULIPs is that they have a flexible investment option. You can easily make money with the help of ULIPs through investment in equity and asset. This can be very alluring to investors. Also, the lockin period is considerable enough. This policy is insurance-based and hence, is more profitable in the longer run. This attracts investors who seek huge benefits in the longer run.
3. Tax Benefits :
According to the Income Tax Act of 1961, the investment made under this policy is subject to a tax deduction under Section 80C. The maximum deduction that is allowed under such a situation is around Rs 1,50,000. Upon maturing, the profits from this policy is relieved from income tax under Section 10D.
4. Flexibility :
The policy is very flexible as it allows you to switch between various investment types with no unnecessary charges. This is why they are kept at a higher pedestal than other traditional plans. Hence, you have the choice in this policy to choose to go with a company’s chosen investment type for you or act under your own free will.
If you are uncertain of a certain type of investment in the market, you can always choose to go with a more profitable aspect of the market. You can stick to the low-risk debt funds or take up the more profitable growth funds if the market suits you. If you have made the investment for 15 years, you will get ample opportunities to do so.
5. Transparency :
This is also a very important factor of this policy that attracts investors in large numbers. You will know everything as the situation emerges. This is not possible with the traditional plans available in the market.
This means that the additional charges and the current position of your investment are made known to you. But, in traditional investment, nothing would be shared with you. This makes ULIPs much better than these traditional plans, in cases of long term investment.
The Cons of ULIPs and Problems Faced:
The disadvantages of ULIP are:
1. Doesn’t Provide The Same Benefit As Standalone Products :
Advisors would give you advice of buying life insurance and mutual funds on a separate basis and as it would be a more beneficial form of investment. Standalone investments give more returns and fulfill the goal of the investor. In the ULIP benefits of both the key aspects are subdued. This means that individually both parts have their own importance.
2. Returns Can Be Compromised at Times :
ULIPs have a lot of charges associated with them that are mentioned above. This means that in the long run, the investment profits will be reduced by a considerable amount because of these charges.
3. Volatility :
The profits on your investment are volatile in nature. This means that they are subject to market risks. This is because they are equity-based. If you have zero risk appetite then, you cannot invest in this scheme. A risk factor is always involved if you are thinking to get involved in the working of this scheme. Though if you can tolerate moderate to low-level risks, you should consider this investment procedure and adhere to it.
Frequently Asked Questions :
1. How does ULIP differ from Mutual Funds?
ULIP is a mixture of investment and insurance, whereas mutual funds are purely investment-based. Also, ULIP isn’t taxable, whereas funds are.
2. How does ULIP differ from ELSS?
ELSS is taxable above one lakh rupees and also, @10. ULIP premiums are not taxable but the profits are. The ULIP profits may vary as many charges are involves but, ELSS provides profits of 12% to 14% on average. Also, they have a difference of two years in their lock-in periods.
3. How do ULIPs differ from PPF?
The lock-in period differs by a large number. PPF has a 15 year lock-in period. The minimum period of ULIp is 5 years and it can be extended to 15 years. Both are not subject to taxes but, the profits are. PPF is backed by the government and hence, is risk-free with guaranteed profit. ULIP has no surety.
ULIP is a mixture of investment and insurance and its premiums are not taxable but the profits are. ULIP gives you a wise opportunity to provide protection to your family in case of any emergency. So go ahead and invest in the plan.
Sapna Debnath says
Thank you for the Great detailed article. lot of misconceptions got cleared by reading your articles and found very important information. great work. will surely follow your blog