‘Save half of what you make’ - it’s something our elders have always advised us to do. But these are trying times, with retail inflation rising off the charts, and saving money in the bank not being enough anymore. The uncertain global situation has highlighted the importance of <b>investing</b> in the right place. And the uncertainty of life has time and again reminded us how invaluable <b>insurance</b> is.
Enter Unit Linked Insurance Plans
An effective blend of the two components that help us and our loved ones stay financially afloat.
What Is A Unit Linked Insurance Plan?
A ULIP is a product that offers you an opportunity to invest in market instruments to fulfil your long-term goals. Along with that, it also provides you with a life insurance cover so your dependents stay protected even in your absence.
Just like every other plan, you pay premiums to buy a ULIP.
One portion of the premium is used to provide the life insurance cover, and
The remaining amount is invested.
Let’s understand both of its components, step by step.
I. The Investment Component Of A ULIP
ULIP is the only type of life insurance plan that lets you invest in the stock market. Therefore, its returns are not fixed, but ‘linked’ to the performance of the stock market.
What Happens When You Invest In A ULIP?
- The premiums paid by you and other policyholders are pooled together in a market fund.
- Each market fund is managed by professionals called Fund Managers , who help in maximising the returns.
- You can choose the asset class and invest in them - based on the market conditions, your risk tolerance, and return expectations.
Types of Asset Classes
- Here, the premium you pay is invested in the equity or stock market. These funds can offer you a really high return over an investment period.
- However, please note that they subject you to a higher risk, and are extremely volatile.
- Here, the premium is invested in debt instruments, like - corporate bonds, government securities, and other low-risk investment tools.
- Debt instruments usually generate fixed returns. Hence, they are considered much safer than equity investments.
- Here, the premium is invested in short-term money market instruments, like - commercial papers, bank deposits, treasury bills, etc.
- They are a type of debt fund that possesses high liquidity and are also known as Cash Fund or Liquidity Fund. You can expect good returns here.
- The average maturity of a money market fund is 1 year, whereas the average maturity of a debt market instrument could be longer, say 5 years.
What Happens After You Have Invested In A ULIP?
Number of units = (Invested Money - Charges) / Net Asset Value
For example, Ritwick buys a ULIP on 1st July 2022. He pays a premium of Rs. 50,000. Let’s assume that the NAV on the day of his purchase was Rs. 100. Now, after the charges applicable on the ULIP (explained later), Rs. 45,000 is ready to be invested into the fund.
Therefore, the total units he received
= (Invested Money - Charges)/Net Asset Value
= 450 units
NAV changes every day, and so does the Fund Value
NAV is simply the market value of a single unit on a particular day. And the Fund Value is the market value of the total number of units you own with the insurance company on a particular day.
Due to the fact that the NAV is solely dependent on the market conditions and changes every day, the fund value of your investment also changes every day.
Fund Value = NAV x Number of Units
Let’s take Ritwick’s example again. He owns 450 units. Assuming that the NAV on 15th July, 2022 was Rs. 1000 -
Fund Value = NAV x Number of Units
= 1000 x 450
= Rs. 4,50,000
What Are The Charges Applied To ULIPs?
To manage the fund, the insurance company will deduct certain ‘charges’ from the premium you pay. And then invest the rest.
Premium Allocation Charges
When an insurer issues the ULIP, there are several initial expenses that they incur. Expenses, like - the cost of underwriting the policy, medical tests, agent’s commission charges, etc. - are deducted from the premium you pay through the Premium Allocation Charge.
Policy Administration Charges
As the name suggests, this charge is deducted by the insurer at the start of every month for administering or maintaining your policy. They cancel some units proportionately from each of the funds selected by you.
Fund Management Charges
It’s imposed by the insurance company for managing your funds. It’s charged as a percentage of the fund’s value and is deducted before calculating the NAV (Net Asset Value) of the fund. The Fund Management Charge is adjusted from NAV on a day-to-day basis.
Fund Switching Charge
As discussed before, during policy purchase, insurers allow you to choose a fund as per the risk you want to take, and the financial goals you want to achieve. If the fund you selected is not performing up to your expectations, you can move your money to a fund that may get you better returns. This is called fund switching. And the charge applied on fund switches is known as Fund Switching Charge.
Surrender or Discontinuance Charge
ULIPs come with a lock-in period of five years and you cannot withdraw any funds during this period. But suppose, you choose to stop paying the premiums and discontinue the policy within the lock-in period. In that case, your money will be transferred from your current fund to a Discontinuance Policy Fund. But before transferring, the insurer will deduct a Discontinuance Charge as a percentage of the fund value or as a percentage of the premium.
Now that we have covered the investment component, let’s talk about the second part -
II. The Insurance Component Of ULIP
In case you pass away during the policy term, your nominee will receive a Death Benefit. The money will act like a safety cushion, help them achieve their short and long-term goals, and also pay off any pending loans/liabilities. The insurance component makes sure your family gets to live a comfortable life, even in your absence.
The Death Benefit can be either -
- Sum Assured or Fund Value, whichever is higher
- Sum assured + Fund Value
Points To Be Noted:
- In ULIPs, the Sum Assured is usually 10 times the annual premiums paid. Depending on the product, it could also be another multiple, say 15 times or 20 times the premium.
- If you make any withdrawals from the fund value and pass away after 2 years, that amount will be deducted from the Death Benefit.
- Mortality Charges will be levied by the insurer for providing an insurance cover to you. It will vary across individuals because they depend on a variety of factors, like age, gender, etc. Also, it is deducted on a monthly basis, proportionately from your chosen fund by redemption of units.
How Does ULIP Work?
A ULIP Plan is a type of life insurance plan that has two parts. When you pay your premium, some of the money goes towards providing life insurance coverage, while the rest is invested in market instruments.
The insurance company takes the remaining premium and invests it in different funds as per your choice, like debt funds, equity funds, money market funds, etc. after deducting certain charges. ULIPs give you the flexibility to choose the funds that align with your investment-related goals and the amount of risk you’re willing to undertake.
The plan offers two types of benefits - Maturity Benefit and Death Benefit.
- The Maturity Benefit is the same as the fund value at the time of policy maturity.
- The Death Benefit depends on the type of ULIP Plan you choose. It can either be the sum assured and the fund value (whichever is higher), or sum assured plus the fund value.
What is ULIP NAV?
ULIPs provide returns based on the Net Asset Value (NAV) of the fund. The NAV represents the market value of each unit in the fund on a specific day. When you invest in ULIPs, your money is divided into units with a specific face value and invested in market-linked funds of your choice. The allocation of units is determined by the amount you invest.
The value of each unit is called the NAV, or Net Asset Value. The NAV changes every day, just like stock prices, because it is linked to the market and is calculated on every business day. It basically showcases any growth or decrease in the asset’s value.
Here is the formula to calculate NAV:
NAV = (Market value of the fund - Charges to manage the fund)/Total units collectively held in the market
What Are Top Funds In ULIP?
There are various fund options that you can choose from in a ULIP, including -
- Equity Funds
Your money will mainly be invested in stocks or equities by a skilled fund manager. You can choose to opt from large-cap, mid-cap, and small-cap equity funds. These funds offer the possibility of greater returns, but they also come with inacreased risk.
- Debt Funds
Debt funds are mainly invested in fixed-income securities, such as bonds, government securities, etc. They are considered to be less risky than equity funds, but they may also provide lower returns. However, these funds are a good choice for you if you prefer a more conservative approach to investments.
- Money Market Funds
These funds are a type of debt investment option that puts money into short-term, safe, and highly liquid assets such as commercial papers, bank deposits, and treasury bills. They can provide you with good returns (after equity and debt funds).
- Balanced Funds
Are you looking for a middle ground between risk and return? Balanced funds, also known as hybrid funds, could be the answer for you. These funds provide a mix of both equity and debt investments, aiming to strike a balance between the potential for capital appreciation (through equities) and stability (through debt).
Here are some of the charges imposed under ULIPs -
- Premium Allocation Charge
This charge is deducted from your premium at the time of payment which covers agent commissions, administrative costs, and more. After deducting this charge, a major portion of your premium is invested.
- Policy Administration Charge
Every month, this charge is deducted from your policy to cover administration and maintenance costs by cancelling a proportionate amount of units from your chosen funds.
- Fund Management Charge
Every insurance company has fund managers who oversee the management of funds. The fee for the fund managers, known as FMC, is deducted by insurers on a daily basis and paid as a percentage of the fund's value.
- Fund Switching Charge
The fee applied for changing funds is called the Fund Switching Charge. This fee is deducted from your existing fund before investing the remaining amount in the new fund. Alternatively, it may be deducted by cancelling units proportionately from each selected fund.
- Partial Withdrawal Charge
In Unit Linked Insurance Plans (ULIPs), you have the option to withdraw funds. However, certain insurers may charge a fee for this feature, known as the Partial Withdrawal Charge. This fee is typically a percentage of the amount you withdraw.
- Mortality Charge
This charge is applied by the insurer on a monthly basis for providing life insurance coverage. It is calculated based on factors such as age, gender, and more.
- Surrender or Discontinuance Charges
If you cancel or stop your policy before the 5-year lock-in period, you will incur a fine. This fine will be deducted either as a percentage of the premium or a percentage of the fund value.
- Premium Redirection Charges
ULIPs offer you the flexibility to modify the allocation of your future ULIP payments among various funds. However, there may be a fee levied by some insurer for making these changes. This is known as a premium redirection charge
What Are The Benefits Given By A ULIP?
Maturity Benefit (i.e. Investment Returns)
In case you survive the policy term, you shall receive a Maturity Benefit. It is equal to the Fund Value as calculated on the policy maturity date.
In case you do not survive the policy term, your nominee shall receive a Death Benefit, equal to either -
Sum Assured or Fund Value, whichever is higher
Sum assured + Fund Value
Let’s understand this better - with the help of an example.
Namrata purchases a ULIP for which she has to pay an annual premium of Rs. 2,10,000 for the next 20 years. She, unfortunately, passes away during the policy term. Now, the death benefit will be paid out to her husband, who is the appointed nominee.
Assuming that the NAV on the date of purchase was Rs. 400, and after deducting the charges Rs. 2 lakhs were invested -
Hence, the number of units owned by Namrata
Now, let’s see how the death benefit will work.
Situation #I The death benefit is either the sum assured or the fund value, whichever is higher,
Let’s assume that the sum assured is 10 times the annual premium. So in this case -
Sum Assured = 10 x Annual Premium
= 10 x 2,00,000
= Rs. 20,00,000
Note that the fund value is calculated based on the NAV and the accumulated units. Let’s assume that her plan accumulates an additional 2000 units till the date of her death.
Therefore, the total accumulated units = 500 + 2000 = 2500
Let’s assume that the NAV on the date of her passing away is Rs. 500.
So the Fund Value on that date
= NAV x Owned Units
= 500 x 2500
= Rs. 12,50,000
Now, since the Sum Assured (Rs. 20 lakhs) is higher than the Fund Value (12.5 lakhs) at the time of Namrata’s death, her husband will receive a Death Benefit of Rs. 20 lakhs.
Situation #II The death benefit is the sum assured + the fund value
As we just calculated, the Sum Assured is Rs. 20 Lakhs and the Fund Value is Rs. 12.5 lakhs.
So Death Benefit = Sum Assured + Fund Value
= Rs. (20,00,000 + 12,50,000)
= Rs. 32,50,000
Therefore, Namrata’s husband is eligible to receive Rs. 32.5 lakhs as the Death Benefit.
Option Of Partial Withdrawal
As discussed before, when you buy a ULIP and keep paying the premiums regularly, a fund value begins to accrue. You get the option of withdrawing a portion of the fund value that has accrued over time.
However, there is a 5-year lock-in period for these plans. So once you purchase a ULIP, this fund value cannot be withdrawn or liquidated for a period of five years. After this period ends, you can begin making partial withdrawals, for any need you may have. For example, to pay for emergency hospitalizations or pay off EMIs.
Funds Can Be Switched
Market conditions are volatile and hence, they can affect the performance of funds. If your funds perform badly, you can switch your money to a fund that is better aligned with your financial goals - on the basis of your risk appetite and return expectations.
Please Note that your existing fund value shifts to another fund. But any new premiums added will be invested in the fund you picked during the policy purchase.
You can tailor the ULIP to your own needs and requirements -
Premium Payment Term
You can select the premium payment term based on your convenience and financial situation. You get the following options -
Limited Pay: You can choose to pay all your premiums in larger and faster instalments while remaining covered until the end of your policy duration.
Single Pay: You can pay off your premiums in one go, and enjoy a cover till the end of the policy term.
Regular Pay: You can pay the premiums according to the policy schedule, i.e., till the end of the policy term.
Premium Payment Frequency
You can customise how frequently you want to pay your policy premiums. There are four options available -
Accidental Death Benefit Rider
Semi-annual payment option
Quarterly payment option
Monthly payment option
ULIPs also come with Riders, which are optional add-ons. They are specifically designed to widen your policy's coverage. A rider can be purchased by paying an additional fee.
There are 3 types of riders available with Unit Linked Insurance Policies -
Accidental Death Benefit Rider
Waiver of Premium due to Critical Illness Rider
Waiver of Premium due to Accidental Disability Rider
Note: There may be more riders available, depending on the product.
Provides Tax Benefits
Tax benefits are available on the premium you pay every year under Section 80C of the Income Tax Act, 1961. And, under Section 10(10D), you can avail of tax exemptions on the withdrawals you make, and the returns you or your nominee receive.
Features of ULIPs
Here are some of the features of ULIPs worth considering:
- Dual Benefit
With a ULIP Plan, you can invest in the market and also have life insurance coverage. If you live beyond the policy duration, you'll get a maturity benefit, which is the fund value. But if you unfortunately pass away during the policy duration, your nominee will receive a death benefit. This money can be either the sum assured or the plan’s fund value (whichever amount is larger) or sum assured plus the fund value, depending on the type of policy you opt for.
With a ULIP Plan, you have the freedom to select the funds you prefer, such as equity, debts, etc and the investment strategy you prefer. You can also switch your existing funds to different ones without having to purchase a new policy. Additionally, after the lock-in period, you can partially withdraw funds if needed.
- Systematic Investment
Under a ULIP Plan, instead of trying to predict the market, you get to invest a set amount of money (premiums) at regular intervals. You need to pay premiums monthly, quarterly, semi-quarterly or annually on a regular basis.
- Expertise of Fund Manager
You also get a lot of guidance and assistance from your fund manager, who has a lot of experience and knowledge, for maximising the returns on your investment portfolio.
There is a compulsory lock-in period of 5 years in ULIPs. This means that for the initial five years of your policy, you will not have the option to surrender it or withdraw the entire amount you have invested. This requirement is set by the Insurance Regulatory and Development Authority of India (IRDAI).
You have to pay different charges for ULIPs, such as premium allocation charges, policy administration charges, fund management charges, and more. It's important for you to understand these charges, along with when and how many years they will be levied for, because they can affect your returns.
Types of ULIPs
ULIPs can be of 2 types as follows:
- Type 1
If you pass away during the policy term, your nominee will receive either the sum assured or the fund value of the ULIP Plan, whichever is higher.
- Type 2
In the event of your unfortunate demise during the policy term, your nominee will receive both the sum assured and fund value. Rest assured that your nominee will receive the guaranteed sum assured, and in addition to that, the fund value will be provided based on market performance.
Why Should You Invest in ULIP Schemes?
Let’s look at some of the reasons why Unit Linked Insurance Plans are worth considering -
- Wealth Creation
ULIPs help you grow your wealth in the long run. By investing in funds like equity and balanced, ULIPs offer the opportunity to increase the value of your investment and accumulate wealth over time.
- Investment Option
ULIPs give you the freedom to choose your investment options based on your return expectations, risk tolerance, and life goals.
- Financial Security for Family
In case of your unfortunate demise during the policy term, your nominee/s will receive a lump sum amount. This can either be the higher of the sum assured or the fund value, or can be the sum assured plus the fund value.
- Fund Switching
You can switch between fund options to adapt your investment strategy as your goals and risk appetite evolve. And, switching is exempt from tax.
- Partial Withdrawals
ULIPs offer the flexibility of making partial withdrawals for unexpected financial requirements, after a 5-year lock-in period. However, it's important to note that certain ULIPs may have specific conditions or charges related to such withdrawals.
Rest assured, the insurance provider will always prioritise transparency when it comes to the ULIP Plan you purchase. They will provide you with all the information about charges, investment value, fund’s past performance, and more.
- Tax Saving
You can save on taxes for the premium payments, withdrawals, and returns received by you or your nominee under Sections 80C and 10(10D) of the Income Tax Act, 1961 - subject to certain terms and conditions.
Calculate ULIP Plan Returns Using the Power of Compounding
You can calculate your absolute returns (i.e. the returns an investment has given to you within a defined time span) with the help of these two values: the current NAV (Net Asset Value) of the plan and the initial NAV. Follow these three simple steps to calculate the Absolute Return:
1. Subtract the initial NAV from the current NAV.
2. Divide the value you get by the initial NAV.
3. Multiply the result by 100 to get a percentage value.
Here is the formula to calculate your absolute returns:
[(Current NAV - Initial NAV)/Initial NAV] × 100
You can also check the absolute returns through online calculators available on reliable websites.
ULIP returns are not fixed, but you can estimate them using ULIP return calculators by factoring in the rate of return. Many online ULIP return calculators are available on the internet that use assumed rates to determine the potential returns.
Let’s look at the below steps to be able to use the calculator efficiently:
- Gather all necessary information before using a ULIP returns calculator, such as personal details, fund allocation, desired investment amount, premium payment terms, etc.
- Find a trustworthy platform offering an online ULIP returns calculator. It helps to get an estimate of potential returns based on the data you input.
- Once you access the ULIP returns calculator, you will be required to input the necessary details.
- Some calculators offer the flexibility to adjust premium allocation between different funds.You can choose to allocate a percentage of your premium to equity funds, debt funds, or other options to suit your risk appetite and financial goals.
- The expected rate of return for the funds can also be set in some calculators.
- Once all the necessary details are entered, hit submit.
The ULIP calculator estimates investment returns based on the information you provide. Also, these returns are based on assumptions about fund growth rate and market performance. Different calculators can use different methods for returns estimation.
A Detailed Framework For Buying A ULIP
Minimum Entry Age: 30 days or 18 years, depending on the product.
Maximum Entry Age: Generally 60 or 65 years. It can vary and range from 45 to 70 years, depending on the product and premium payment term.
Before the insurer issues your policy, you may be required to submit your income proof. This is called the financial underwriting process and is done to confirm if you will be able to pay the premiums till your premium payment term. The minimum income criteria may vary based on the products, insurers, and the amount you plan to invest.
Minimum And Maximum Premium
Minimum Annual Premium Criteria: This can be as low as Rs. 10,000-15,000 per annum, or as high as Rs. 1-2 Lakhs per annum, depending on the product, premium payment term or premium payment frequency that you choose.
Maximum Annual Premium Criteria: Can be Rs. 2 Lakhs, 4 Lakhs, 6 Lakhs, etc. Most new-age ULIPs do not have any specific maximum limit.
Minimum And Maximum Policy Term
Minimum Policy Term: This can be as low as 5 years or 10 years, depending on the product.
Maximum Policy Term: This can be 20-50 years or even more, depending on the product. Some products, like Whole Life ULIPs, may have a maximum policy term of 99 years.
Minimum Lock-In Period
Once you start investing in a ULIP, a lock-in period of 5 years gets activated. This means during the initial 5 years of your policy period, you cannot access and withdraw the fund value of your policy. You can make withdrawals only after the lock-in period gets over.
Premium Payment Term
As mentioned earlier, you can choose how you want to pay the premiums -
At once (Single Pay)
For a limited duration, say 5 years or 10 years (Limited Pay)
Till the end of the policy term (Regular pay).
How To Buy a ULIP Online?
Let’s look at the below-mentioned steps to find a ULIP that matches your financial goals, risk tolerance, and investment preferences -
- First, conduct thorough research and compare ULIPs offered by various insurance platforms.
- Choose the insurance platform that provides the ULIP that perfectly matches your requirements.
- Next, visit the official website of the insurance platform you have chosen. Take a look at the ULIPs available and select the one that best suits your needs.
- To make an informed decision, review the policy wordings of all the selected plans and use their premium calculators to check the premium quotes.
- You'll find an online application form for the ULIP you've chosen on the insurance platform’s website. Make sure to accurately fill in all the personal and financial information.
- In order to move ahead, you'll need to provide Know Your Customer (KYC) documents. These usually include proof of identity (such as an Aadhaar card, passport, or PAN card), proof of address, a recent photograph, etc. Upload these documents.
- You can conveniently pay the first premium online using a debit card, credit card, net banking, or other accepted payment methods.
- Next, the insurance complany will review your application and process it.
- You'll get an e-policy, and maybe a physical policy document as well to your registered address. Keep it safe for future reference.
How To Choose The Best ULIP In India?
You need to choose a ULIP Plan that matches your financial goals and risk appetite. Here are the few things to help you pick the right plan -
- Review The Life Insurance Cover
Take a look at the life insurance coverage provided by the ULIP. Make sure it gives enough financial protection for your family in case something unexpected happens. Take the time to carefully read and understand the policy document with all the terms and conditions, charges, features, and so on. It's important to be fully aware of every aspect of the policy.
- Look At The Premium Payment Term Options
ULIP offers a wide variety of premium payment term options. It's important to select a plan that has a premium payment term that fits well with your income and financial responsibilities. You need to check if the ULIP Plan gives you flexibility in paying premiums. For instance, check if it permits additional payments or the flexibility to adjust premiums according to your evolving situation.
- Explore The Features
You should search for plans that have features like wealth boosters, loyalty additions, return of mortality charges, and more. These features will help increase the value of your plan as time goes on.
- Check If There Is An Option For Riders
Check if the ULIP offers additional options to expand your coverage as per your needs, such as a waiver of premiums or a disability rider and so on. A rider is an optional benefit that can be added to your base policy at a certain extra cost.
- Switch Between A Variety Of Funds & Investment Strategies
Make sure that the ULIP Plan you choose gives you the flexibility to switch between funds, make additional investments whenever you want, etc.
- Check Charges and Fees
In ULIPs, you'll encounter different charges, such as premium allocation charges, fund management charges, etc. These charges can have a big impact on the returns. Know about these charges and pick a plan that fits your budget and financial goals.
Some of the Unit Linked Insurance Plans by Top Insurance Companies
Let’s have a look at some of the top ULIPs worth considering -
Aditya Birla Sun Life Fortune Elite Plan
- Make unlimited partial withdrawals for free, up to 20% of the total fund value.
- Choice of four premium payment options: monthly, quarterly, semi-annually, and annually.
- Additional riders, such as the Accidental Death Benefit Rider Plus and Waiver of Premium Rider are available.
- Various options like return optimiser, systematic transfer, etc. are available.
- Enjoy a loyalty benefit with guaranteed benefits.
- You can top up your investment with an additional amount of up to Rs 5,000.
Bajaj Allianz Future Gain II
- Enjoy unlimited free switches.
- 13 fund options and 2 investment strategies for you to choose from.
- Option to pay the premium yearly, half-yearly, quarterly, or monthly.
- Add riders such as critical illness, permanent accident disability, waiver of premium, accidental death benefit, and family income benefit.
- Option to top up your premium by up to Rs 5,000.
HDFC Life Click 2 Wealth
- Enjoy unlimited free switches.
- 11 fund options to choose from.
- Riders such as Income Benefit on Accidental Disability Rider, Critical Illness Plus Rider, and Protect Plus Rider.
- Opt for Fund Booster features like Return of Mortality Charges (ROMC) Top-Up Premium, etc.
- Only FMC (Fund Management Charge) and Mortality Charge are imposed.
ICICI Prudential Signature
- Enjoy unlimited free switches.
- Make unlimited free partial withdrawals.
- Access to 19 fund options and 4 investment strategies.
- Enjoy loyalty benefits and wealth boosters.
- Top up your investment up to Rs 2,000.
- Receive Return of Mortality and Policy Administration Charges at maturity.
- Enjoy coverage until 99 years with the Whole Life Option.
Max Life Platinum Wealth Plan
- 12 different funds to choose from for investment.
- Choose from 2 investment strategies.
- Choose from monthly, quarterly, semi-annual, or annual premium payment plans.
- Additional rider options available, such as Care Rider, Critical Illness Rider, and Disability Secure Rider.
- Access loyalty additions and wealth boosters.
- Free premium redirection service available, with a maximum of 6 times per policy year.
ULIPs vs Mutual Funds vs Traditional Plans
Let’s look at the table below to understand their differences -
A plan that provides both investment and insurance
Solely focus on investment and do not offer life insurance protection.
An insurance policy that offers guaranteed returns and includes a savings component.
The goal is to assist you in generating wealth to achieve your long-term goals, while also providing a life cover.
The main aim is to create wealth or reach specific financial targets.
The goal is to offer a life cover with guaranteed returns.
The returns vary depending on the fund you select, from high to low. Also, ULIPs are market-linked investments, which means that returns are not fixed or guaranteed.
No guaranteed returns. The returns vary based on the fund selected, ranging from high to low.
Returns are fixed, not dependent on the market. The payout is predetermined at the time of purchasing the policy.
Lower returns because you do not invest in direct market linked funds.
Different levels of risk based on the type of assets invested in, such as equity, debt, etc.
Different levels of risk based on their asset class (equity, debt, etc.)
You can withdraw a portion of your accumulated funds after a lock-in period of 5 years.
Allowing you to withdraw money partially or completely whenever required, provided liquidity
Withdrawal restrictions apply.
Great flexibility, allowing you to switch funds and choose the type of fund you want to invest in, etc.
Provides flexibility with various fund options to suit your specific needs.
Less flexible with fixed payout structure.
Maturity benefit and Death benefit
and Income generation
Death benefit, Maturity benefit, & Survival benefit
Note: The benefits vary as per your plan.
Premium is split into insurance and fund investments.
No premium allocation. You purchase units in the fund, and the entire amount is utilised for investments.
However, some fund management charges can be deducted.
Premium allocations may happen at the backend.
- Premiums qualify for tax deductions under Section 80C of the Income Tax Act.
- Maturity proceeds and death benefits are tax-exempt under Section 10(10D) of the Income Tax Act.
These tax benefits are subject to terms and conditions
Apart from tax-saving mutual funds (ELSS), which are eligible for deductions under Section 80C, other mutual funds do not offer specific tax advantages.
- Premiums paid are eligible for tax deduction under Section 80C of the Income Tax Act.
- Maturity benefit and death benefit are typically exempted from taxes.
Which Investor Class is Best Suited for Investments in a ULIP?
A ULIP Plan is a great choice for you if you are a salaried or self-employed person with dependents. It is a long-term life insurance plan that combines the benefits of wealth creation and life insurance in one package.
A ULIP can be an ideal choice if -
- You have long-term financial goals like planning for retirement, saving for your children's education, or buying a house, etc.
- You are comfortable with market-linked risks.
- You need life insurance coverage and an investment option.
- You prefer a systematic approach to investing with regular premium payments.
What Happens If You Stop Paying Premiums For A ULIP?
To keep a ULIP running, you need to pay the premiums till the end of the premium payment term. But there may be several reasons that may make you unable to pay it. You may be experiencing a financial crisis, or the plan may no longer fit your financial needs. In such cases, you can stop paying. However, here are the consequences you need to know about -
If You Stop Paying Premiums During The Lock-In Period
The surrender or discontinuance charges will be deducted from your fund value. The remaining fund value will be shifted to a Discontinued Policy Fund.
The insurance cover, if any, will stop immediately.
You can choose to revive or surrender your policy. If you surrender it, you receive the Discontinued Policy Fund Value - the fund value on the day of discontinuance with interest.
If You Stop Paying Premiums After The Lock-In Period
In this case, your plan will convert to a reduced paid-up policy. This means the Sum Assured will be reduced in proportion to the number of premiums you have paid to the total number of premiums payable during the policy term.
You can choose to revive or completely withdraw your policy. If you don’t, your policy continues on a reduced paid-up basis.
Now, let’s understand ULIP, its components and its benefits better - by taking an example.
Pawan, a 40-year-old, bought a ULIP in May 2022, for a period of 25 years. He will be required to pay an annual premium of Rs 1.00,000. Let’s assume that the insurer deducted Rs. 6000 as charges. Hence, the amount to be invested per year is Rs. 94,000.
He needs a good amount for his son’s higher education and will require the cover amount for the same. He has appointed his wife, Priti, as the nominee. The Death Benefit will provide enough funds to meet his son’s goal.
His policy states that the Death Benefit will either be the Sum Assured or the Fund Value on the day of his death, whichever is higher.
So let’s see how the ULIP works.
Assuming that the Net Asset Value of the units was Rs. 500 on the date of policy purchase -
Total Units = (Amount Invested - Charges)/Net Asset Value
If Pawan Survives The Policy Term -
Let’s say he accumulates another 1500 units from the premiums he invests over the 25-year policy term.
So the total units accumulated till 2046 = 188 + 1500 = 1688 units
The maturity benefit will be equal to the fund value as calculated on the date of the policy maturity.
Let’s assume that the NAV on the policy maturity date is Rs 600.
Therefore, Maturity Benefit
= NAV x Owned Units
= Rs. (600 x 1688)
= Rs. 10,12,800
So Pawan is eligible to receive Rs. 10,12,800 as the maturity amount in 2046, if he survives the policy term. Once it is paid out to him, the policy will terminate.
If Pawan Passes Away During The Policy Term -
As mentioned, the death benefit may be either the sum assured or the fund value, whichever is higher.
Let’s assume the sum assured is 10 times the annual premium.
So in this case -
Sum Assured = 10 x Annual Premium
= Rs. (10 x 1,00,000)
= Rs. 10,00,000
The fund value is calculated on the basis of the NAV and the accumulated units. Let’s assume that the NAV on the date of his passing away is Rs. 500, and he accumulates another 900 units from the premiums he invests till the date of his death.
Total units accumulated = 900 + 188 = 1088
So Fund Value on that date
= NAV x Owned Units
= 500 x 1088
= Rs. 5,44,000
Therefore, since the Sum Assured (Rs. 10,00,000) is higher than the Fund Value (Rs. 5,44,000), his wife, Priti, will receive a Death Benefit of Rs. 10,00,000.
What Are the Tax Benefits Associated?
Here are the tax benefits available with ULIPs -
Under Section 80C of the Indian Income Tax Act, you can get a tax deduction of up to Rs. 1.5 lakhs in a financial year for the premium you pay towards ULIP.
If you withdraw your funds from ULIP after the lock-in period of 5 years, the entire amount will be tax-free.
When your policy reaches maturity, the benefit you receive is exempt from taxes as per section 10(10D) of the Income Tax Act. Similarly, if something unfortunate happens to you during the policy period and your nominee receives the death benefit, that amount is also exempt from tax under section 10(10D) of the Income Tax Act.
Note: Tax Benefits are subject to terms and conditions. Also, benefits under Section 10(10D) are not valid in case of single premium products which don’t offer a sum assured that is 10x of the premium.
How Does A ULIP Compare With Other Investment Options Under 80C?
When it comes to taxation, it is significant to understand how a ULIP Plan stands in comparison with other market instruments:
Unit Linked Insurance Plan
If you invest in ULIPs, you can get a tax deduction on the premiums you pay under Section 80C, up to a maximum limit of Rs. 1.5 lakh per financial year.
If you survive the policy tenure, the Maturity Benefit you receive is completely exempt from tax, subject to conditions.
Note: ULIPs require you to keep your money invested for a minimum of five years.
Public Provident Fund
PPF is a low-risk investment supported by the government. You can invest in PPF for a long tenure, up to 15 years. After 7 years, partial withdrawal is allowed.
When you contribute to PPF, you can get a tax deduction under Section 80C. And when your investment matures, the interest and maturity proceeds are entirely exempt from tax.
Employee Provident Fund (EPF)
EPF is a retirement savings scheme where you and your employer make contributions to the fund. If you are a salaried individual, EPF is compulsory. The entire amount invested in EPF is exempt from tax if you withdraw it after working continuously for five years.
National Savings Certificate (NSC)
The NSC offers a fixed interest rate set by the government when you buy it. You'll need to keep your investment locked in for either 5 or 10 years, depending on the type of NSC you choose. Investing in NSCs can also help you get a tax deduction under Section 80C, but keep in mind that the interest you earn will be taxable.
Tax-Saving Fixed Deposits
Tax-saving fixed deposit accounts are offered by banks and financial institutions. They give you a fixed interest rate and come with a lock-in period of 5 years. When you invest in tax saving FDs, you can get a tax deduction under Section 80C. However, the interest you earn on your investment is taxable.
Equity Linked Savings Scheme (ELSS)
ELSS funds mainly invest in stocks and can give you higher returns. You’ll have a lock-in period of 5 years when you invest in ELSS.
You can get a tax deduction under Section 80C for ELSS investments up to INR 1.5 Lakhs per financial year, and the returns you make are exempt from tax.
But if you make long-term capital gains (LTCG) over Rs 1 lakh from ELSS investments, you will be taxed at a rate of 10%.
Things to Avoid When Investing in a ULIP
Here are some of the things you need to avoid when you make a ULIP investment -
- Making An Investment Without Knowing The Plan
Before investing in a ULIP, make sure you fully understand how it works, its charges, and the associated risks. Take the time to read the policy documents and seek clarification from your insurance advisor regarding any complex terms or features.
- Not Taking Into Account The ULIP Charges
ULIPs have different charges, such as premium allocation charges, policy administration charges, fund management charges, etc. Neglecting these charges can greatly affect your returns.
- Not Paying Heed To The Lock-In Period
ULIPs usually have a lock-in period of 5 years during which you cannot withdraw your funds, without paying penalties. And, if you surrender your policy before these 5 years, you will be penalised with surrender charges and the fund value will be shifted to a discontinued policy fund. Only once the lock-in period is over, will you receive the total fund value that has been accumulated.
- Making Investments Only For The Insurance Cover
If you're the main breadwinner for your family and your only goal is to safeguard them, term insurance is a good option for you and not ULIP.
- Not Accounting For Your Risk Exposure
Evaluate your risk profile and select funds accordingly. It is recommended to align your fund allocation with your risk tolerance and life goals. Avoid haphazardly investing in equities, as higher returns are accompanied by higher risks.
- Keeping Your Portfolio Undiversified
Diversify your investments to reduce risk and potentially increase returns. Putting all your money into one fund or asset class can be risky due to volatile market-linked returns. So, it's wise to choose a combination of debt and equity options for a well-rounded portfolio.
- Giving Up On Your Policy Too Early
Don't give up on your ULIP too soon, especially in the beginning, as you may face surrender charges and significant losses. ULIPs are meant for long-term investments, so it's wise to hold onto them for a longer period of time.
Myths About ULIP Investment
Here are some common myths hovering around ULIPs -
- Myth 1: Investing in a ULIP Plan Can Be Risky
Truth: A ULIP (Unit Linked Insurance Plan) gives you the freedom to select from different types of funds, such as equity, debts, money market funds, and more. The level of risk in a ULIP depends on the funds you choose. For example; if you prefer a safer option, you can go for a debt fund. Ultimately, it all comes down to your personal preferences and choices.
- Myth 2: ULIPs Generally Don’t Offer Good Returns
Truth: Investing in a ULIP Plam for a long period of 5-10 years can potentially lead to good returns. The returns you earn depend on the specific fund you choose. It's important to note that you have the flexibility to customise your plan based on your investment preferences.
- Myth 3: The Life Cover Will Be Affected By Market Volatility
Truth: The performance of the fund will not impact your life insurance coverage. If unfortunately you pass away during the policy term, your loved ones will receive either -
- The full life cover (i.e. the sum assured) or the value of the fund, whichever is higher.
- Sum assured plus the fund value.
- Myth 4: It’s Impossible To Discontinue ULIPs
Truth: You have the freedom to terminate your ULIP at any time. But if you choose to surrender it before the lock-in period, there are some important things to consider:
- Your fund value will be moved to a separate fund known as the Discontinued Policy Fund, which gives a guaranteed* low return limit set by the IRDAI.
- You will only receive this money after the lock-in period is over.
- In case of your unfortunate demise during the lock-in period, the Discontinued Policy Fund amount will be given to your nominee.
- The insurer will apply certain charges known as surrender or discontinuance charges.
- Myth 5: ULIPs Don’t Provide Accident and Health Coverage
Truth: A ULIP Plan offers additional benefits called riders to enhance your coverage. Some of these riders include Critical Illness, Waiver of Premium, Accidental Death Rider, etc.
- Myth 6: ULIPs Are Not Liquid
Truth: ULIP allows you to withdraw your money after a period of 5 years (which is known as the lock-in-period). The remaining units that are not withdrawn continue to be invested. Additionally, you have the flexibility to switch funds based on the market conditions.
- Myth 7: There is No Option To Invest Surplus Fund
Truth: Certain ULIPs offer a feature called Top-Up premium. It is an additional payment that you can make on top of your regular premium payments. It allows you to use your extra savings to make the most of your investment portfolio.
- What is the difference between a ULIP and SIP?
A ULIP Plan, also known as a Unit Linked Insurance Plan, is a unique financial product that offers the benefits of both life insurance coverage and investment opportunities in different funds. On the other hand, a SIP, which stands for Systematic Investment Plan, is an investment strategy that involves regular fixed investments in mutual funds or ULIPs. Essentially, SIP is a method to invest in either ULIPs or mutual funds.
- What does the assured sum mean in a unit-linked insurance plan?
The sum assured is the predefined amount of money that your loved ones will receive when you pass away when the ULIP is active. A ULIP combines investment and insurance, so there are two payout aspects involved when it comes to the death benefit payable under the plan -
- The larger of the sum assured or the fund value, or
- The sum assured plus the fund value.
- What does fund value mean?
The fund value in a ULIP Plan is the market value of your investment on a specific day. If you choose to redeem all the units on that day, you will receive this amount as long as the policy's lock-in conditions are met.
- Is a Unit Linked Insurance Plan (ULIP) subject to taxation upon maturity?
According to Section 10(10D) of the Income Tax Act, the Maturity Benefit you receive when your policy ends is completely exempt from tax. It's important to note that in order to enjoy these tax benefits, you must meet the eligibility criteria set by the tax authorities.
- Are taxes levied on the surrender value of ULIPs?
Certainly. In the event that you decide to surrender before the completion of the 5-year lock-in period, the entire surrender value will be regarded as income for the current financial year and will be included in your gross total income. Consequently, it will be subject to taxation as per your applicable tax slab rate.
- Are the interest earnings on Unit Linked Insurance Plans (ULIPs) subject to taxation?
The interest earned on the maturity of a ULIP is exempt from tax if your annual premium does not exceed Rs 2.5 Lakhs per financial year. However, if your annual premium exceeds this amount, the interest will be subject to Long-Term Capital Gains (LTCG) tax at a rate of 10%.
- What happens if I am unable to hold my ULIPs beyond the initial 5-year period?
If you decide to cancel after a period of 5 years, you will receive the amount equal to the current value of the fund on that specific day.
- What exactly is a low-cost ULIP? Why should you invest in it?
A low-cost ULIP is a type of ULIP that comes with reduced charges and fees, such as premium allocation charges, policy administration charges, etc. or even reversal of charges like mortality charges, etc. Opting for a low-cost ULIP can be beneficial as it helps minimise the impact of these charges on your investments, allowing you to maximise your returns.
- What are the features of ULIPs?
Some of the key features that can be found in ULIP include death and maturity benefits, fund allocation, fund switching, partial withdrawals, tax benefits, and more.
- How do you earn money through ULIPs?
You have the option to invest in funds that offer higher returns, such as equity-based funds, or diversify your portfolio in a prudent manner. You can choose from various investment strategies, such as trigger-based strategies, switching funds based on market conditions, and consider staying invested for the long term.
There are so many investment options and opportunities available today, that it becomes quite tough to pick the right one for yourself. ULIP is a great option if you want high returns, along with a small life cover. Make sure its benefits and features are aligned with your needs and future goals before you purchase it for yourself. We hope this article will help you make a good decision today!