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Insurance Plans Best Suited For You
Irrespective of whether you are in your 20s, 30s or 50s, you are sure to have certain life goals and financial objectives and dreams that you want to fulfil. When you are in your 20s, you may wish to save enough money to buy a car or your dream home. In your 30s, you are likely to be focussed on providing for your children’s education. In your 50s, you are likely to save money for your children’s education as well as building your retirement corpus.
Whatever be your financial objective, you need funds to make your dreams come true. This is where, a ULIP – Unit Linked Insurance Plan comes into the picture. It helps you save for your financial goals while also offering your life protection.
A ULIP is a combination of an investment tool as well as life insurance. It’s one of the most sought-after insurance products since it provides the best of both worlds – insurance and life protection.
The first ULIP plan in India was introduced in 1971 by UTI (Unit Trust of India). Following the success of this plan, LIC introduced the LIC Mutual Fund in 1989. Today, there are several insurers who offer ULIPs in India. Some of the leading ULIP providers include HDFC Life, ICICI Pru, Max Life, Bajaj Life, Edelweiss Tokyo and several others.
About Travel Insurance
ULIP – Unit Linked Insurance Plan is a mix of insurance and investment. The primary goal of a ULIP plan is to help in wealth creation, along with offering life cover to the insured. When you invest in a ULIP, the insurer invests a portion of your premium towards life insurance, and the rest is invested into a fund – debt or equity. You can choose how to invest the investment portion of the ULIP based on your long-term financial goals like a child’s education, retirement planning, and others.
When you take a ULIP, you can pay the premium either monthly, semi-annually or annually. A small portion of the premium goes to your life insurance, while the rest is invested in – stocks, bonds, or debts – just like a mutual insurance plan.
You have to pay the premium for the entire policy term – say 5, 10 or 15 years. During this period, the insurer accumulates mutual fund units in your account. You can choose whether you want to invest your money in equities or debt. If you are an aggressive investor who can afford moderate to high risks, then you can choose an equity-oriented fund. On the other hand, if you are a conservative investor, then you can opt for debt-oriented funds.
The latest generation of ULIP plans has lower charges compared to older ULIPs. While traditional insurance plans offer returns of 4 to 6%, ULIPs offer double-digit returns, especially when you have chosen equity-oriented funds.
Though an insurance product, a ULIP offers more than life protection. It’s a goal-based investment tool that you can use to meet your various financial goals. However, you should understand the plan thoroughly before you invest in it so that you are aware of where your money will be invested.
Just like regular insurance plans, you have to pay premiums for your Unit Linked Insurance Plan. The only difference here is that only a portion of your premiums go for life insurance coverage, while the rest is invested in a variety of funds.
Aggressive investors can opt for equity-oriented funds, while conservative investors can choose debt-oriented funds. If you want the benefits of growth as well as security, then you can opt for balanced funds that are a mix of equities and debts. Alternatively, you can switch between funds depending on your needs at various stages of life.
For instance, when you are younger, you are likely to have lesser responsibilities, and hence, you can choose for equity funds that give higher returns but come with higher risks. As you grow older and start a family, your responsibilities increase. You can then switch to debt or balanced funds that offer lower returns but have lower risks.
The insurer pools money from all policyholders and then invests it into funds as per the choice of individual policyholders. Once the amount is invested, the total corpus is divided into several units, which have a certain face value. All investors are allocated a certain number of units that are in proportion to the amount they have invested.
The value of each unit is known as NAV (Net Asset Value). The NAV value increases or decreases depending on the change in the value of the underlying assets. If you want to withdraw the corpus, either completely or partially, the corresponding amounts of units are sold.
Before you invest in a unit-linked insurance plan, you need to be aware of the salient features of ULIPs.
1. Liquidity
ULIP plans generally have a lock-in period of five years. The term liquidity refers to the ease of cashing an investment without impacting the returns. ULIP plans allow policyholders to withdraw their investments partially or completely, after the end of the lock-in period.
2. Transparency
ULIPs are one of the most transparent investment products. All the charges and fees levied like the fund management fee, policy administration, mortality charges, etc. are disclosed in the policy document. Additionally, the policyholder has complete knowledge of fund allocation.
With ULIPs, you don’t have to worry about any hidden charges or fees.
3. Flexibility
ULIPs provide policyholders with complete flexibility. You can switch fund allocations based on your changing financial goals, risk appetite, etc.
4. Tax Benefits
ULIPs offer dual taxation benefits under both Section 80C and Section 10(10D) of the ITA. This means you can enjoy tax deductions on both your premium payments as well as the returns
5. Mitigation of Risk
Your funds are managed by professional fund managers, thereby helping you mitigate the common risks associated with stock market investing. This makes ULIPs a good choice for investors who want to enjoy the returns offered by the stock market, but don’t want to invest in it individually.
6. Potential for Higher Returns
ULIPs offer you the potential to enjoy higher returns in the long term. Since your funds are invested in the stock market; it generates higher revenues compared to other modes of investment like Fixed Deposits or Recurring Deposits.
7. Top-Up Facility
ULIPs allow investors to increase their investments. This feature is known as “top-up” facility, and you can invest any amount over your current premium. Tax benefits apply to the top-ups too.
For instance, if you find that your chosen fund is performing better than your initial expectations, you can invest more funds in it, whenever possible and increase your returns.
8. Switch Facility
This facility allows you to change the ratio of invested amount from one fund to another. For instance, if you wish for more equity exposure, you can increase the percentage of funds for equity and vice versa.
The switch facility allows investors to alter their investments according to their changing investment horizons and risk appetites.
ULIPs offer several benefits to policyholders. Here’s a quick rundown of the major benefits of investing in ULIPs:
Investment, Insurance & Tax Benefits
ULIPs offer the triple benefits of investment, insurance, and tax savings. When you invest in ULIPs, you enjoy tax savings, get life cover as well as reap market-linked returns.
Death Benefits
ULIPs offer financial assistance to your beneficiary (family members) in the case of your unexpected death during the policy period. The actual sum assured to your beneficiary on your death depends on the type of policy.
Maturity Benefits
On maturity of the policy, you are offered maturity benefits, which are generally equal to the current value of your funds. However, some insurers also other maturity benefits like loyalty bonuses and more.
Market-Linked Returns
If you have wanted to invest in the stock market, but have been hesitant to invest on your own, then ULIPs are an excellent alternative. Here, a portion of your premiums is invested in the stock market – equities, debts, bonds, securities, etc. Professional fund managers handle investments on your behalf, helping you enjoy market-linked returns.
Tax Benefits
Apart from the other benefits, ULIPs also offer tax benefits under Section 80C for the premiums and Section 10(10D) for the returns.
Long-term Investment Benefits
If you are looking to generate maximum returns on your investments in the long term, then ULIPs are a great choice. Since you stay invested for a long time, short-term market volatility and fluctuations do not affect your investments. This helps you enjoy higher returns.
Withdrawal Benefits
Another major benefit of ULIPs is that it can come quite handy during an emergency. If you require funds immediately, you can withdraw a portion of your accumulated funds. These withdrawals are tax-free.
Unit Linked Insurance Plans offer the dual benefit of both – insurance and protection. With high returns on investment, ULIPs are one of the most popular investment products on the market. If you are wondering why you should invest in ULIPs, here are seven compelling reasons to add ULIPs to your investment portfolio:
1. Dual Benefits
As mentioned above, ULIPs offer dual I-I benefits: Insurance and Investment. It’s a great tool to grow your wealth over the long term. Additionally, it also offers you life coverage, helping to protect your family members financially in case of your unexpected death.
A pre-decided amount from your premium is set aside for insurance investments, while the rest is invested in your preferred investment product (debt or equity).
2. Tax-Exemptions
One of the biggest advantages of ULIPs is that it helps you enjoy tax deductions at three stages – investment, returns, and withdrawals.
3. Top-Up the Policy at any time
ULIPs allow you to increase your investments at any time. Let’s say, you receive a bonus at work or receive a lump sum as an inheritance from a parent/grandparent, you can invest the funds as additional funds to your existing ULIP policy. This significantly increases the amount you have accumulated in your investment.
4. Option to Switch Fund Allocations
ULIPs allow you to switch the ratio of exposure to equities and debt funds. You can alter the percentage of equity, debt, balanced, and hybrid funds in your portfolio based on your various risk appetite that changes with your age.
ULIPs are the only investment tools that provide investors with the option to switch their funds partially or wholly from one fund to another, without incurring any additional charges. If you are an investor who follows the market regularly, then you can make use of this feature to get the most from your investments.
5. Higher Returns compared to other popular Investment Products
ULIPs offer better returns when compared to other insurance and investment products. Since ULIPs invest your money across different asset classes; you get to enjoy the benefits of diversification.
When compared with tax-saving funds, ULIPs present several benefits. Though tax-saving funds are likely to offer higher returns, the amount you get on maturity depends on the equity market performance. This can lead to loss of returns if the market is not performing well during the fund tenure.
Endowment plans, on the other hand, provide you with a fixed lump sum at the end of the tenure. Tax-saving FDs have a similar lock-in period like ULIPs. However, the returns are added to the investor’s income, thereby attracting taxes.
Insurance experts recommend that all individuals have life cover that is a minimum of their ten years income. ULIPs offer life cover that is ten times the annual premium. Thus, with a ULIP, you can protect your wealth against market volatility, while also securing your family’s future. Highly safe and with easy liquidity, ULIPs are excellent tools to get life cover as well as grow your wealth.
Several types of ULIPs cater to different financial goals. Understanding the various categories of ULIPs, their benefits and features is a must to find the right ULIP plan that suits your specific requirements. Take a look at the different types of ULIPs and find out how you can use these to achieve your specific goals.
If you are looking to build your corpus over a long period of time, then ULIPs for wealth generation is one of the best investment tools for you. You can use these plans to accumulate funds for huge financial commitments like purchasing a house, saving for your child’s higher education, your retirement, etc. The added benefit of life cover gives you peace of mind, knowing that your family is protected at all times.
Life stage ULIPs are plans that alter your fund allocations based on different life stages. For instance, when you are younger, you are not likely to have many financial commitments and other responsibilities in life. You can afford to take risks. Hence the initial allocation in these plans have a higher proportion of equity, while the debt component is kept low.
As you grow older, your financial liabilities tend to increase – home loans, car loans, children’s education, etc. You cannot afford to take aggressive risks like when you were younger. When you reach this stage, life-stage plans alter fund allocation and the debt component increases, while investments in equities decrease.
Life stage plans ensure that the fund allocation matches your age and changing financial requirements.
The major life-stage based ULIPs are:
Child Education Plans
One of the major responsibilities as a parent is to ensure that you provide your children with a high-quality education. The education children receive today is the guarantee for their future. Today, education costs are increasing at a staggering rate all across India. From metros to small towns, school fees, and other miscellaneous fees like co-curricular, extracurricular make up the major expenditure of a family’s monthly budget.
ULIPs help you save for your children’s education costs, thereby setting them up for a bright future. Here are some of the features of child-education ULIPs.
Popular Child ULIP Plans in India for 2019
Retirement Plans
Retirement is the stage when you get freed from your pressing work duties. It’s time to relax and enjoy your life at a leisurely pace. However, to make your retirement free from financial troubles, you need to start planning right from an early age. Investing in retirement ULIP plans help you build a safety net that you can use during your retirement.
With increasing life expectancy, thanks to advancements in medical technologies, today people are having a longer retirement, and it’s common for people to live up to their 80s and 90s. The average Indian today lives up to 77.5 years. This makes it highly crucial to building a sufficient retirement corpus, to help you maintain your lifestyle in your sunset years, and to take care of other emergency expenses.
Popular Retirement ULIP Plans in India for 2019
Another classification of ULIP plans is based on the death benefits offered. The two major types are:
Type 1 ULIP Plans
In these plans, if the policyholder dies unexpectedly during the policy tenure, the nominee is provided with the death benefit. The death benefit is equal to the sum assured or the fund value, whichever is higher.
The mortality charge in this plan keeps on decreasing every year, as the sum at risk reduces. Here, the sum at risk denotes the difference between the fund value and the sum assured by the policy. In simpler terms, the sum at risk is the amount the insurer has to pay out of pocket if the policyholder dies unexpectedly during the policy tenure.
Let’s illustrate this with an example. Let’s say; a policyholder takes a ULIP plan with a sum assured of Rs. 50 lakhs. The policyholder has paid annual premiums for 7 years now, increasing the value of the fund to Rs. 30 lakhs. If the policyholder dies unexpectedly, then his family receives Rs. 50 lakhs the sum assured (which is higher than the current fund value of Rs. 30 lakhs).
Here, the sum at risk is the difference between the sum assured (Rs. 50 lakhs) and the fund value (Rs. 30 lakhs) is Rs. 20 lakhs, which is borne by the insurer.
Type 2 ULIP Plans
In this type of ULIP plan, if the policyholder dies unexpectedly during the policy period, the nominee receives a lump sum that is a total of the sum assured along with the fund value.
Since the lump sum payment is higher, the premiums for Type 2 ULIP plans is higher than the premium for the Type 1 ULIP plan. In this plan, the mortality charge increases with every policy year, since the risk of death increases as the policyholder grows older.
Let’s illustrate Type 2 ULIP plans using the above example. Let’s say; a policyholder takes a ULIP plan with a sum assured of Rs. 50 lakhs. The policyholder has paid annual premiums for 7 years now, increasing the value of the fund to Rs. 30 lakhs. In the event of the death of the policyholder, the beneficiary receives a total of Rs. 80 lakhs which is the sum assured (Rs. 50 lakhs) along with the fund value (Rs. 30 lakhs).
While ULIPs work well for all categories of investors, there are certain people for who ULIPs are the best choice:
Riders are add-on covers that you can opt for by paying an extra premium. Riders offer you extra coverage at a nominal cost.
The common riders available with ULIP plans are:
Accidental Death and Permanent Disability Benefit Rider
As the name implies, when you choose this add-on cover, the insurance provider provides the nominee with the sum assured (according to the plan you have chosen) along with the rider benefit, if the policyholder passes away unexpectedly during the policy term.
The purpose of choosing this rider is to provide your loved ones with an additional supplementary financial coverage, in case of an accident of the breadwinner of the family.
There are plenty of times when an accident doesn’t mean the death of the policyholder but could lead to other devastating conditions like permanent disability like loss of limbs, eyesight, etc. This leaves the victim handicapped or crippled, leading to loss of jobs, pay, etc. The permanent disability rider provides the policyholder with a rider benefit, helping the policyholder manage difficult circumstances.
Critical Illness Rider
Critical diseases like cancer, kidney failure, paralysis, heart attack, bypass surgeries can occur anytime, and if advanced prevents the policyholder from working and earning. Additionally, the treatment costs for critical illnesses are quite high.
When you choose a critical illness rider cover, the insurer provides you with a lump sum payment when the policyholder is diagnosed with any critical illness mentioned in the policy document.
Term Rider
The term rider provides the nominee of the policyholder with a lump sum payment or monthly payments if the policyholder passes away during the term of the policy. This is highly crucial when the life insured is the primary breadwinner of the family.
When you choose monthly payouts, your nominees receive regular monthly payments that help them take care of their daily needs, without missing out on the lifestyle they are accustomed to.
Waiver of Premium Rider
When the policyholder meets with an unexpected accident and gets disabled or passes away, the family of the policyholder finds it hard to pay future premiums. The earning member of the family is no more, and the family’s income comes to a standstill. In such situations, it’s difficult for the policyholder’s family to continue paying future premiums, causing the policy to be discontinued.
You can avoid this situation by opting for waiver of premium rider. With this rider, all your future premiums are waived off, helping you or your family members continue enjoying the other benefits offered by the ULIP plan.
When you invest in a Unit Linked Insurance Plan, you have to pay the following charges to your insurer for the administration services and other benefits provided. These charges are deducted from the premiums you pay.
Administration Charges
This is a fee that the insurer charges for your policy every month. These charges are deducted by cancelling the corresponding units from the funds you have chosen.
Fund Management Charges
As the name implies, these are the fees that you pay the insurer for managing your funds on your behalf. The fund management charges are calculated as a percentage of the fund’s value and are deducted before calculating the NAV (Net Asset Value) of the fund.
Mortality Charges
Depending on the age of the insured and the amount of cover, the insurer may levy mortality charges to provide death cover to the policyholder.
Partial Withdrawal Charges
ULIPs allow you to withdraw the funds accumulated partially after three years of policy commencement. Depending on your policy plan, partial withdrawals may or may not attract charges.
Premium Allocation Charge
The premium allocation charge is calculated as a fixed percentage of the premium. It’s higher in the initial years of the policy and decreases later on. The premium allocation charge depends on the following factors – whether you pay regular premiums or whether you have chosen single premiums, the premium payment mode, payment frequency, and the size of the premium.
Surrender Charges
The insurer levies these charges when you prematurely surrender the units in hand. You may or may not have surrender charges depending on when you surrender the policy.
Switch Charges
You can switch between funds based on your changing financial goals and requirements. Most insurers allow you to make a particular number of switches free of cost every year. Once you have exhausted the number of free switches, you have to pay a particular amount for every subsequent switch. The switch charges are deducted by cancelling the appropriate number of units from the funds you have chosen.
There are several ULIP plans in India offered by several insurers. A ULIP plan that meets the financial goals of one person may not work for another. There are several factors to consider while choosing the right ULIP plan that suits your specific financial requirements.
Here are the top things to keep in mind while selecting ULIPs:
1. Choose the right ULIP plan that meets your financial goals
ULIP plans allow investors to invest in equities, debts, or a mix of both. While equities have high-growth potential in the long-run, they come with higher risks. Debt funds, on the other hand, are low risks but help you preserve your wealth. Depending on your financial goals, investment horizon, and risk appetite, you can decide whether you want to invest in equity or debt or a mix of both.
Additionally, there are specific ULIP plans that help you meet certain financial goals like your child’s education, retirement, medical or personal emergencies, or building a corpus. If you have a specific goal in mind, then choosing a ULIP plan specifically created for that financial goal, helps you to meet your needs on time.
2. Decide the right amount of life cover
Apart from helping you meet your financial objectives like funding your child’s higher education or building a corpus for retirement, ULIPs also secure your family’s future. ULIPs offer life cover that protects your family from financial emergencies in the case of your unexpected death.
The insurer provides your family with a lump sum life cover that they can use to meet their routine expenses, in the unfortunate case of you passing away. Generally, all ULIP plans offer a minimum life cover that is ten times your annual premium. You can also increase this amount by getting in touch with your insurer.
Let’s say - you take a ULIP plan with an annual premium of Rs. 1 lakh. The minimum life cover offered by the plan is 10 x 1 lakh that is Rs. 10 lakhs. However, if your financial liabilities are higher than this amount, you can increase the life cover, by getting in touch with the insurer.
3. Try to stay invested over a long term
Apart from providing you with life cover, one of the major goals of ULIPs is to help you build your wealth over the years. When you stay invested in ULIPs for a longer term, the insurer rewards you with bonuses like Wealth Boosters and Loyalty Additions to help you build your wealth in the long term.
4. Consider the Tax Benefits
According to the ITA (Income Tax Act) of 1961, you can enjoy tax deductions when you invest in Unit Linked Insurance Plans. ULIPs offer various tax advantages at different stages of the policy. They are:
Stage 1: Entry Stage
You can enjoy tax benefits on the premiums you pay for ULIPs under Section 80C, 80CCC and 80D. Tax benefits under these sections are subject to the conditions of the ITA and are subject to changes from time to time.
Stage 2: Earnings Advantage
The wealth you build by investing in ULIPs is not subject to taxation. It is free from taxes.
Stage 3: Switching Advantage
You can switch your allocated money from equities to debts and vice versa, without having to pay any extra taxes.
Stage 4: Exit Advantage
Additionally, the maturity benefit (the amount you receive at the end of the policy term) is free from taxation.
5. Be Aware of the Charges Levied under your ULIP Plan
While ULIPs offer double benefits like – protection and savings, it has some charges attached to it. You need to be aware of the various charges before purchasing a ULIP plan. The common charges include:
While these charges may appear too much, remember that the overall charges of your ULIP plans reduce in the long-term, helping you build a significant corpus over the years. However, remember that your life insurer has the right to revise the various charges and fees over a period of time.
6. Know the features of your preferred ULIPs
To get the best out of your ULIP investments, you need to be aware of the various features in it. Some of the common features of ULIPs include:
Make sure to read your product brochure thoroughly to understand all the available features and other terms and conditions. If you have any doubts in the policy document, don’t hesitate to get in touch with a representative of your insurance company.
Understand the benefits, compare different policies, and then make the right decision.
A ULIP calculator is a special tool that helps investors calculate the premiums of different ULIP policies and expected returns. There are several online ULIP calculators that you can use for free. Some ULIP calculators provide you the option of comparing different ULIP plans, helping you choose the right plan that meets your investment goals as well as your budget.
A ULIP calculator helps you decide the amount of premium you have to invest to meet your short-term and long-term financial goals.
How to use it?
Before you use a ULIP calculator, make sure to have the following details in hand – your preferred premium frequency (one-time, monthly, yearly, etc.), the amount you wish to invest and expected returns.
Step-by-step process of using a ULIP Calculator
Once you enter the details, you can get a list of ULIPs that meet your criteria. Go through the terms and conditions and features of each plan to pick the right plan that works for you.
Several insurers offer unit-linked insurance plans. Here is a list of the top insurers and the popular ULIPs offered by them.
| S.No. | Insurer | ULIP Plans Offered for 2019 |
|---|---|---|
| 1 | Aegon Life ULIP Plans |
|
| 2 | Aviva Life ULIP Plans |
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| 3 | Bajaj Allianz ULIP Plans |
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| 4 | Bharti AXA Life ULIP Plans |
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| 5 | Aditya Birla Sun Life ULIP Plans |
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| 6 | Canara HSBC ULIP Plans |
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| 7 | DHFL Pramerica ULIP Plan |
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| 8 | Edelweiss Tokio Life ULIP Plans |
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| 9 | Exide Life ULIP Plans |
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| 10 | Future Generali ULIP Plans |
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| 11 | HDFC Life ULIP Plans |
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| 12 | ICICI Prudential ULIP Plans |
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| 13 | IDBI Federal ULIP Plans |
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| 14 | IndiaFirst ULIP Plans |
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| 15 | Kotak Life ULIP Plans |
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| 16 | LIC ULIP Plans |
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| 17 | MaxLife ULIP Plans |
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| 18 | Reliance Nippon Life ULIP Plans |
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| 20 | Sahara Life ULIP Plans |
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| 21 | SBI Life ULIP Plans |
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| 22 | Shriram Life ULIP Plans |
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| 23 | Star Union Dai-chi ULIP Plans |
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| 24 | Tata AIA ULIP Plans |
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Quite often, investors confuse ULIPs with mutual funds since both these products invest in the stock market. Here’s a table comparing the key differences between the two.
| Features | ULIPs | Mutual Funds |
|---|---|---|
| Scope of the product | Investment along with life insurance | Pure investment product |
| Lock-in period | Compulsory five years lock-in period | No lock-in period. Can be withdrawn any time. |
| Switching between funds | Alternating between different fund classes – equities to debts, and vice versa is permitted. | Switching between funds of the same fund house is permitted. However, this is considered as redemption, and the resulting gains from it are taxable. |
| Charges Levied | Premium allocation charge, mortality charges, administration charges, and fund management charges. | There is no entry load. However, you have to pay the applicable exit load for premature withdrawal, and the annual fund management. |
| Tax Saving | Allows tax deductions under Section 80C of the ITA. | Only ELSS mutual funds are eligible for tax deductions under Section 80C of the ITA. |
| Fund Management Charges | The charges for ULIPs are lower than mutual funds. The IRDAI requires insurers that the total charges not to exceed 2.25%. | The charges for mutual fund managers are higher than the charges levied by ULIPs. |
As you can see, the biggest difference between the two is the ULIPs offer life cover, while mutual funds do not. This means, when you invest in a ULIP, apart from growing your wealth, you can also protect your family, in case of an untimely death.
Here’s an example illustrating the differences between the two. Let’s say Mr. A chooses a ULIP with an annual premium of Rs. 50,000. On the other hand, Mr. B purchases mutual fund units worth Rs. 50,000 per year. Both A and B invest the same amount. However, a portion of Mr. A’s investments is spent on purchasing life cover for him. Mr. B has not invested in life cover.
In the unfortunate case of an accident, and Mr. A passes away, the insurer pays his family a life cover worth Rs. 5 lakhs or the fund value, whichever is higher. On the other hand, if Mr. B passes away, there is no life cover for him and his family does not receive any death benefits from his mutual fund investment.
Apart from death benefits, there are other ULIP plans that offer coverage for specific life goals. For instance, if you invest in a child's education policy, the insurer provides you with a lump sum payment to cover for your child’s higher education.
If you were to pass away unexpectedly, the insurer waives your future insurance premium payments. Additionally, these policies also provide a regular monthly income for your family.
When choosing between mutual funds and ULIPs, you have to consider the following questions,
To phrase it in a nutshell, ULIPs are best suited for investors with long-term objectives of wealth creation along with life cover requirements. ULIPs offer you the double benefit of wealth creation as well as insurance.
Additionally, ULIPs work well for individuals who don’t have the knowledge or time to monitor the equity market or different fund options offered by mutual fund investments. If you wish to enjoy the benefits of equities, without having to track different funds, ULIPs are an excellent alternative.
Investors often get confused between ULIPs and ELSS. Here is a comparative analysis between the two popular investment products.
| Features | ULIPs (Unit Linked Insurance Policies) | ELSS (Equity Linked Savings Schemes) |
|---|---|---|
| Scope of the Product | An insurance cum investment product. | A pure investment product. |
| The objective of the Product | To provide investment benefits along with life coverage. | It’s a professionally managed fund that helps individual investors diversify their equity investments. |
| Regulator | IRDAI (Insurance Regulatory and Development Authority of India) | SEBI (Securities and Exchange Board of India) |
| Lock-in Period | ULIPs have a mandatory lock-in period of five years. | ELSS plans have a mandatory lock-in period of three years. |
| Tax Benefits | You can claim tax deductions for the premiums paid for ULIPs, under section 80C of the ITA. However, the gains you get from your ULIP investments are taxable. | Both investments and returns up to Rs. 1 lakh are not taxable under Section 80C according to the LTCG (Long Term Capital Gains) Rule. |
| Applicable Charges | Premium allocation charge, mortality charges, administration charges, and fund management charges. | No entry load. But exit load and fund management charges are levied and vary based on the fund house. |
| Expected Returns | This depends on the type of investments chosen by the policyholder – equities, debts, mixed. | Since the scheme is market-linked, the returns depend on the type of scheme. Generally, investors can expect returns of up to 12 – 14% for long-term investments. |
| Liquidity | You can withdraw your funds anytime after the mandatory lock-in period of five years. | You can withdraw your funds anytime after the mandatory lock-in period of three years. |
| Switching | Switching between fund allocations – equity, debt, balanced, hybrid, and money market funds is permitted. However, the number of switches and the charges of switching vary from one insurer to another. | No switching allowed. Your entire funds are locked in equities and equity-oriented funds. You can opt for STP (Systematic Transfer Plan) once the mandatory lock-in period of three years is completed. |
| Maximum Charges | Charges are capped to 2.25% for policies with a term period of 10 years and above. For shorter policies, the charges are capped at a maximum of 3%. | The fund management charges vary depending on the fund house and is deducted in the NAV. |
| Transparency | It’s not necessary for the insurer to provide you complete details on where your money is getting invested. | All fund management houses must provide complete details of all the stocks purchased and the number of stocks held by the fund house. |
| Risk | High risks. Return of capital is not guaranteed, but life coverage is guaranteed. | High risks, return of capital is not guaranteed and the fund’s performance depends on the individual fund manager and the fund management house. |
ULIPs Vs. ELSS – which is best?
ELSS is ideal for investors who are looking for short-term investments with high growth potential. ULIPs, on the other hand, work best for long-term investors with specific financial objectives along with a need for life coverage.
ULIPs is a unique investment product that offers triple benefits – insurance, life coverage and savings – in a single product. There are several myths surrounding ULIPs. Here, you can find the truth behind popular ULIP myths. Make sure to understand the product features and benefits so that you can make informed decisions.
Myth #1: ULIPs are not a good choice for Investments.
Reality Check:
ULIPs are an excellent investment product to build your wealth. It gives you the power to invest accordingly based on your financial goals and risk appetite. You can choose whether you want to invest in equities, debts, hybrid, large, mid, or small cap funds based on your specific goals and investment horizon.
The biggest benefit is that ULIPs give you the complete flexibility to decide the funds you want to invest in. Hence, it’s one of the most customizable investment products that help you achieve financial goals in different stages of life.
Myth #2: You should withdraw your funds as soon as the lock-in period is over.
Reality Check:
ULIPs work the best for investors with long-term investment goals. They are not structured for short-term investments. If you have an investment horizon of 10 years or more, then you can expect to generate the best returns from ULIPs investments.
So, if you want to get the highest returns from your investments, then it’s highly recommended that you continue staying invested, even after the lock-in period is over.
Myth #3: ULIPs have a lock-in period of 3 years.
Reality Check:
The IRDAI (Insurance Regulatory Development Authority of India) has revised the lock-in period of ULIPs from three to five years, post-2010. The new regulations favours investors with the following benefits – lower initial charges, the higher sum assured, and higher returns.
Myth #4: ULIPs have plenty of charges, and the amount invested in funds is quite low.
Reality Check:
This is one of the biggest myths of ULIPs. People falsely assume that much of their premium investments is spent on various charges, and the actual investment is low. While it’s true that earlier ULIPs used to have these drawbacks, the new generation of ULIPs introduced post-2010 have various clauses that benefit investors.
In the first generation of ULIPs, nearly 60 – 75% of the first-year premiums went towards paying the charges. However, with the recent changes introduced by the IRDAI, the charges are now uniformly divided over the first five years (lock-in period). This means, right from the first-year, a significant portion of your premiums goes towards investments.
Additionally, the IRDAI has capped the maximum charges that the insurer can charge policyholders. This has significantly reduced the charges of ULIPs.
If you stay invested for more than ten years, then the insurer can charge only a maximum of 2.25%.
Myth #5: It’s difficult to Liquidate your ULIPs in case of an emergency.
Reality Check:
ULIPs offer you the option of partial withdrawal of your funds as and when required, after the lock-in period. You can partially withdraw the required amount of funds, at no extra costs. Even when you partially withdraw, the remaining units continue to be invested, and it keeps on growing.
Myth #6: ULIPs have high switching charges.
Reality Check:
There are no charges for switching the allocation of funds in ULIPs. The number of free switches available in a year varies from one insurer to another. Make sure to check the number of free switches allowed when choosing a ULIP plan and the insurer.
Myth #7: ULIPs are risky since they are market-linked.
Reality Check:
The life insurance cover in your ULIP plan remains fixed. It does not vary based on market conditions.
When it comes to the investment component, you can choose the required funds based on your risk appetite. If you are an aggressive investor, you can opt for equity funds. On the other hand, if you want to keep your risks low, then debt funds or balanced funds are ideal for you.
ULIPs as such aren’t risky or not. It all depends on the funds you choose. If you find that your investment is getting riskier, you can switch funds at no extra cost.
Myth #8: ULIPs do not offer good returns.
Reality Check:
Ultimately, the returns in your ULIPs are based on the type of asset classes you have chosen – equities, debts, hybrid or balanced, and your choice of fund. With the right choice of funds, and with proper switching, you can generate optimal returns from the market.
Myth #9: You cannot exit a ULIP once you purchase it
Reality Check:
ULIPs come with a lock-in period of five years to inculcate the habit of disciplined savings. At the end of the five year period, you have the choice of whether to surrender your existing policy or continue with it.
You can also make a full withdrawal before the end of the lock-in period. If you do so, there are no exit load or surrender charges, and you get paid the current value of your fund.
However, it’s highly recommended that you don’t surrender the fund mid value unless it’s an emergency. ULIPs generate the best returns by the power of compounding when you stay invested in the long-term.
Myth #10: The Life Cover provided by your ULIP plan decreases when the market dips
Reality Check:
Though ULIP investments are linked to the market, your life cover is kept separate. The life cover is not affected by the ups and downs of the market. Additionally, in the unfortunate case, you were to pass away during the policy term, your beneficiaries receive life cover along with the fund value.
Find answers to all common queries on ULIPs right here.
1. Do ULIPs offer guaranteed returns?
Returns from ULIPs are not guaranteed. The investment risks of ULIPs are borne by the policyholder. The losses or profits are determined by the market performance and the chosen funds. Also, remember that past performance of a product is not an indication that the product will continue to perform similarly in the future.
Make sure to go through the policy document carefully, to understand the risks of the product, before investing.
2. How much return will I get when I invest in ULIPs?
It depends on the funds you are investing in. Equity-oriented funds give returns that are based on market performance. Generally, the equity markets in India have given a return of 15% per annum. However, if you are concerned about the security of your funds, then you can invest in debt-oriented funds that give modest returns of up to 8 to 9%.
3. What are the different types of funds offered by ULIPs?
ULIPs providers offer a wide range of funds to suit the investment goals of different types of investors to meet their objectives, time horizons, and risk profiles. The potential of returns varies from one fund to another, and so does the risks.
Here are some of the common types of funds and associated risk levels:
| Fund Type | Investments | Risk Levels |
|---|---|---|
| Equity Funds | Invested in stocks of companies with the aim of capital appreciation | High to medium |
| Debt Funds | Invested in government securities, corporate bonds, and other fixed-income investment products | Medium to Low |
| Cash Funds (Also known as money market funds) | Invested in bank deposits, cash, and other money market instruments | Low |
| Balanced Funds | A mix of equity and debt funds | Medium |
4. What are the things to look for before signing the policy document?
To ensure that you avoid any disappointments and conflicts later on, make sure to go through the following details before you sign the document:
5. Can I invest in ULIPs more than my regular premium?
Yes. ULIPs allow additional contribution on top of the regular premium. This facility is known as “top-up” facility. Get in touch with your insurer to know the actual procedure for topping up your investments.
6. Can I request a refund of the premium, if I am not satisfied with the policy?
Yes. According to IRDAI rules, all insurers must provide policyholders with free look-in period after policy commencement. If you disagree to the terms and conditions of the policy, the insurer will refund your premium, after deducting cancellation charges and medical expenses if any. Generally, the free look-in period is up to 15 days of policy commencement.
7. How much of the premium is used to purchase fund units?
Only a portion of the premium you pay is allocated to purchase fund units. The rest is earmarked for your life insurance. The percentage of the premium used to purchase units varies from one ULIP product to another.
8. How much Tax can I save when I invest in ULIPs?
ULIPs offer tax benefits in two ways. You can avail tax deductions under Section 80C for the premiums you have paid, as well as the returns you get from the policy, are tax-exempted under Section 10D.
9. What’s the difference between small, mid, and large cap funds?
When you invest in equity-oriented ULIPs, your insurer invests your funds in small, mid or large cap funds.
10. Do I require a Demat account to invest in ULIPs?
No. You don’t require a demat account for investing in ULIPs. In fact, ULIPs provide you with an alternative way to invest in the stock market, without opening a demat or trading account.
11. Do ULIPs offer a lump sum on maturity, or do they pay in regular installments?
Most ULIPs offer a lump sum payment to the policyholder on the maturity of the plan. However, some ULIP products also dispense the maturity amount in monthly, quarterly, or half-yearly payouts.
12. Can I purchase a ULIP plan for my child and avail tax benefits on it?
Yes. Parents and grandparents can purchase a Unit Linked Insurance Plan for their children and grandchildren and avail tax deductions under Section 80C for the premiums paid.
13. Can I surrender my ULIP policy before the end of the lock-in period?
ULIPs have a lock-in period of five years. Hence, it’s highly recommended that you continue with your premium payments for five complete years from the date of inception. At the end of the lock-in period, you can surrender your policy for free of cost and receive the funds accumulated as a lump sum payment.
However, if you wish to surrender the policy before the end of the lock-in period, you can specify your request to your insurer. Your funds are then moved to a discontinuance fund, and you are guaranteed a minimum 4% returns.
14. What happens to my ULIP if I stop paying premiums?
There are several scenarios depending on when you stop paying premiums. Here are a few situations:
Generally speaking, when you fail to pay premiums, you have the following two options:
15. What is NAV (Net Asset Value)?
The NAV indicates the value of each unit of the fund. It keeps changing every day. The total value of your funds is the NAV multiplied by the number of units you own. The NAV of your fund is displayed on the insurer’s website.
16. How is the fund value calculated?
The fund value is the total amount you have invested in the funds of your choice over the policy period. It’s calculated using the following formula:
Fund value = NAV (Net Asset Value) x Total number of units owned by you.
For instance, if the current NAV is 100 and you own 200 units, then the value of your fund is Rs. 2,00,000.
17. What will I receive at the maturity of the policy?
At the end of the policy period, you are entitled to receive the maturity benefit, which is usually paid as a lump sum to the policyholder. The maturity benefit is the total value of the fund at the time of maturity.
18. What do my family members receive if I die within the policy period?
In the unfortunate case of your death within the policy period, your nominee/beneficiary receives death benefits based on the terms and conditions of your policy.
If you have a one-time pay policy, then the nominee receives death benefits that are the higher of the following:
If you have a regular pay or limited pay policy, the death benefits are provided based on the following:
19. What are the different premium payment frequencies available for ULIPs?
ULIPs can be classified into three different types based on premium payment frequencies. They are:
20. What is the Premium Redirection feature?
When you choose this facility, your future premiums will be invested in a different fund. The premiums you invested earlier will remain in the fund you have chosen before.
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