Unit linked insurance plans (ULIP’s) are plans offered by life insurance providers, which have dual benefits of providing life cover coupled with the benefit of investment. These plans also provide tax benefits under section 80C of the IT act. ULIPs offer investors life insurance cover and the insurer the option to invest in various financial instruments like stocks, bonds and mutual funds and to an extent the stock market. The investment options allow the investor to plan their future from a financial perspective to meet obligations at a future date like education, marriage etc without compromising on the life insurance coverage
throughout the policy coverage period. Hence these features make ULIP’s an extremely favourable insurance plan for any investor/insured.An important fact regarding this plan is that the policyholder bears the investment risk on their investment portfolio and hence different investors choose different plans depending on the investment philosophy of the insurance company and the risk appetite of the insured themselves. As expected, higher the risk, invariably it is higher reward. A unit linked plan is also relatively transparent while highlighting fund management charges, allocation charges etc. upfront. These plans also invariably allow the insured investor to switch plans on a periodic basis between equity to best instruments etc.
Salient Features of ULIPs
As mentioned above, ULIP plans offer an array of features of investment coupled with insurance cover while enjoying tax benefits and remains the most preferred investment choice all investors/insureds. The key features include:
Stock Market linked Returns
A ULIP plan allows the insured to earn market-linked returns on his/her investments as a part of the premium paid in such plans are invested in market funds, both debt and equity to ensure optimum returns to the investor. Importantly the market risk of these investments is to be borne by the insured at all times. This allows investors to NAV data to keep track of returns and ensure they stay invested in the ULIP plans suited to their risk appetite.
Investment and Insurance Benefits
As mentioned earlier, ULIPs offers the triple benefits of investments, life coverage and tax savings. So while the investor ensures they manage to get best returns on their investment without compromising on their life insurance coverage at all times. Given that the insured investor has a choice of plans to invest in and even switch plans if need be, this is an attractive investment proposition.
ULIPs offer tremendous flexibility to the policyholder in terms of being able to switch between different funds (debt/equity) to ensure optimum returns based on their risk appetite. There is also a facility to partially withdraw from the fund subject to terms or the insured can also invest additional sums of money as top-up over regular premiums. The ULIP NAV is an ideal tool for tracking one’s investments on a regular basis. Apart from this the insured also enhance coverage through Riders or Increase in SA.
Corpus Created for Important Milestones
There are various stages in life that require a financial investment. They could be many that could include funding higher education, children’s marriage, other investments like a house or business or just a straightforward annuity for a retirement and this is where ULIP plans come in handy. The investor can plan for these important milestones at the time of investment if they are aware of them or partially withdraw money in case of an unplanned emergency.
Maturity & Death Benefits
ULIP plans come with maturity benefits in case the policyholder survives the duration of the plan and reach the maturity period. In most cases, the plans have the fund value enhanced to take care of the maturity value. A unit linked plan also offers death benefits in case of the death of the investor during the policy term of the plan and the death benefits are the Sum Assured along with the value of the fund as on that date, paid to the nominee.
Apart from the insurance and investment benefits of these plans, Unit Linked Insurance Plans also offers tax exemption benefits for the investor for maximum of Rs. 1.5 Lakh u/s 80C of the IT Act. Importantly, the maturity benefits on ULIPs are also tax free. The minimum Sum Assured or the Death Benefit should be at a minimal of 10 times of the annual premium. If the given this is not the case, the tax benefits are covered at 10% of the SA and its Maturity Benefits are not tax free.
Long-term Investment Benefits
Clearly with so many feature, ULIP plans are one of the most sought after investment instruments for the ones who are seeking to earn maximum returns for their investments they on long-term horizons. Given that market volatility could impact short term returns, it becomes important that the insured stays invested for long term to ensure satisfactory returns. A unit linked insurance plan allows for the long-term investments and the insured can ensure they get these returns by regularly monitoring the returns using NAV and simultaneously enjoying life insurance coverage.
Withdrawal Benefits & Liquidity
An important feature of ULIP plans is their liquidity. The insured investor can withdraw a part or their full investment of their investment at any time in case of emergency, after a minimum lock in period. Generally, such withdrawals are tax free.
Retirement Planning & Financial Security
ULIP’s are also the ideal plan for investment from a Retirement perspective. Equities tend to do well over the long term and hence the insured can stay invested for a relatively long period of time since the retirement corpus will build gradually over this period. As one approaches retirement, one can gradually shift investments to more conservative debt funds to ensure stability and peace of mind.
Transparency is one of the important features of ULIPs. Unlike most other investment tools, ULIPs offer high flexibility to customers to switch their investments on a regular basis using market related information like NAV performance etc. Given that most investments are tock market related, their performance can be tracked periodically to ensure the insure gets the best returns in the end. These plans are ideal for investors who want to avail the benefit of a dynamic stock market without directly investing in the market through shares etc.
Classification of ULIP Plans
ULIP Plans in India can be broadly classified as follows:
|Purpose of the ULIP Plan||Retirement Planning||In this plan, the policyholders/insured makes payments by salary deduction, which is automatically collected in a corpus amount, which is paid in the form of annuities to a policyholder after retirement. These plans have withdrawal option, which gives flexibility and tax free income.|
|Wealth Creation||This plan primarily helps the insured to accumulate wealth over the tenue of the plan. Recommended for persons looking for investment with returns at a fixed time for planned expenditure like education, marriage etc|
|Children’s Education||These plans are specifically for the education (secondary and higher education) of the insured’s children. This is to ensure continuous education of the children. Importantly, these child plans come along with Waiver of Premium (WOP) option which allows waiver of premium on the demise of the primary policy holder.|
|Health Benefits||In addition to some common benefits, ULIP plans provide financial assistance to meet medical contingencies like Cancer and Heart Ailments.|
|Fund Option||Balanced Funds: Fixed Interest and Equity Instruments||Medium Risk|
|Equity Funds: Stocks, Corporate shares, etc.||Medium-High Risk|
|Debt Funds: Corporate Bonds, Government Securities, etc.||Low Risk|
How to find the best ULIP plans?
There are a couple of key parameters to be reviewed by the insured before investing in an ideal ULIP plan :
Claim Settlement Ratio & Solvency Ratio of the Insurance Company
The Claims settlement ration tells the insured what percentage of claims have been paid out by the insurance company. The higher the ratio, the better. The Solvency ratio mentions whether the insurance company will be able to honour its claims in the future. Once again, look for a high ratio for solvency. The IRDA requires insurers to have a solvency ratio of at least 1.5.
Performance of ULIP funds of the Company
ULIPs are an investment as well as insurance products. One should review the performance of ULIP funds over long term. Remember that ULIPs can have equity, balanced and debt funds suitable for investors/policy holders with different risk appetite and investment time horizon. The performance of ULIP funds should compared with their respective benchmarks over long time periods (eg: Nifty 50, BSE100, NSE 500, BSE 200 etc).
Charges Levied under the Plan
Go for a ULIP with affordable charges. The typical charges associated with a ULIP include a premium allocation charge, policy administration charge, fund management fee, mortality charge, discontinued premium charge and switching charge.
Investment Options offered
Many ULIPs offer investment strategies such as Systematic Transfer Plans and lifecycle based investing. Look for ULIPs that offer the strategies most suited to your personal financial goals. It is critical to opt for a ULIP that is in sync with the investment horizon and the investment goals of the investor.
Plan & Finalise Investment Goals
Investment goals are extremely important while planning one’s financial future. Based on the financial and investment goals and reasons for building a corpus, the investor should choose the ULIP plan. The goals could include Higher Education, Children’s Marriage, Financial Needs post Retirement, Investment in Land/House etc and based on when and how much funds are required, the insurance plan can be chosen.
Compare Plans before You Choose
The first step is to scan the market for choosing plans that are in line with the risk appetite and investment goals. Once all the plans have been chosen, they should be compared using the various features like 1) Financial stability of the insurer, 2) Charges levied under each Plan, 3) Claims Settlement Capabilities of the Insurer, 4) Flexibility of the Plan etc and then the optimum plan should be chosen.
Plan Flexibility & Terms are Important
Yet another factor that is to be taken into consideration while choosing a ULIP plan is flexibility that is offered by the plan that include the Investment Flexibility (what options are available to invest) and Tenure (Investment Period). One must also go into the details of the coverages/plans/features etc while making the final decision.
Types of ULIP Charges
ULIPs come with specific charges associated with them across all insurance companies, which can be divided into multiple categories and the following are the important charges that the investor must be aware of:
|Premium Allocation Charges||The charges are levied beforehand on the premium paid by the investor. These are the initial expenses incurred by a company in issuing the policy, like medical examination expenses and underwriting cost.|
|Administration Charges||These charges are deducted periodically for the recovery of expenses borne by the insurer for maintaining a life insurance policy.|
|Mortality Charges||These charges are borne by the insurer to provide a life cover to insured, which vary with the age and sum assured of the policy. These charges are deducted on a monthly basis.|
|Surrender Charges||These charges are for deduction for full or partial encashment of premature units subject to the policy documents. These charges are levied as a percentage of the fund value or as a percentage of the premium.|
|Fund Management Charges||The aggregated sum collected as premium is invested in equity and debt instruments. The insurer bears these charges for fund management, which vary with both fund and plan. The amount is subject to deduction calculating the net asset value or NAV.|
|Fund Switching Charges||ULIP plans allow investors to invest their money in different fund options and also provide them with the option to switch between different funds for which their insurance company will charge the switching fee. Most of the policies provide few free switches every year. Currently switching charges are free upto certain number of transactions per year.|
|Discontinuance Charges||On premature discontinuation of a plan within lock-in period, the insurer deducts a small fee. Since these charges are pre-set by IRDA, these are the same for almost all policies.|
|Partial Withdrawal Charges||The policyholder can carry out lump sum withdrawals from the fund after the policy lapses and subject to the pre-determined conditions. Nevertheless, the partial withdrawals attract charges, as specified in the respective policy document.|