Unit Linked Insurance Plans (ULIPs) are a type of life insurance plan that offer the dual benefits of life insurance and investment. A portion of the premium paid for a ULIP is used to provide life insurance coverage and the remaining portion is invested in a variety of market-linked funds, which one can choose based on one’s risk appetite and time invested. As this is a combination of insurance cum investment, ULIPs can form an important part of investment portfolio besides being a Risk management strategy as well.
ULIPs can be categorised into various types that cater to different investment needs. An overview of the types of ULIPs and their advantages is considered below:
Before that, let us understand how are ULIPs different from endowment policies or money back policies. The difference between endowment and ULIP is that endowment is basically an insurance cum savings plan while ULIP is insurance cum investment plan. As against guaranteed returns in endowments policies, the returns tend to be usually higher in ULIP as they are invested in stock market. Returns are based on performance of the fund one opts for. Various fund options are available to choose from at the time of buying the policy, based on the term of policy and risk appetite, one needs to choose the fund.
Let us consider the types of ULIPs in India:
- Traditional ULIPs:
- Description: These are standard ULIPs that offer a combination of life insurance and investment. The investment portion is usually divided among different funds based on the investor’s choice.
- Features: Fixed premium payments, standard fund options, and long-term investment horizons. Like if it is a 10 year policy, one can choose options of fixed premium paying term like 5 years or 7 years, post which for the balance of the tenure of the policy, no premiums are required to be paid and the invested amount continues to grow as per the choice of funds chosen and on maturity the total fund value is available to investor tax free.
- Child ULIPs:
- Description: These are ULIPs designed specifically to secure a child’s future, these plans combine insurance coverage for the child and investment to build a corpus for future educational or other needs.
- Features: Many such ULIPs often include features like waiver of premium in case of the parent’s death, and investment options geared towards long-term growth.
- Retirement ULIPs:
- Description: These ULIPs focus on providing financial security post-retirement. They help accumulate a corpus over the working years, which can be used for retirement income.
- Features: These ULIPs provide for investment in funds that focus on long-term growth, pension plans, and options are available for systematic withdrawal (SWP) post-retirement.
- Wealth Creation ULIPs:
- Description: Focused on building wealth over a long-term horizon, these ULIPs offer various fund options with different risk profiles. Based on one appetite for risk and tenure, one can choose form the various fund options available.
- Features: These ULIPs give greater flexibility in fund allocation, high growth potential, and options to switch between funds based on market conditions.
Now let us briefly look at the advantages of investing in ULIPs:
- Dual Benefit:
- Insurance and Investment: ULIPs offer both insurance protection and investment opportunities under one plan, allowing for a holistic financial solution.
- Flexibility:
- Investment Choices: ULIPs provide flexibility in choosing from a range of funds (equity, debt, balanced) based on risk appetite and investment goals.
- Premium Payment Options: Options for regular or limited premium payments – meaning one can choose for fixed premium paying years and some also allow for increase or decrease of premiums as needed.
- Tax Benefits:
- Under Section 80C: Premiums paid for ULIPs qualify for tax deductions up to ₹1.5 lakh per annum (under the old regime of tax).
- Under Section 10(10D): Maturity proceeds are tax-free, provided certain conditions are met. Hence this translates into real good returns.
- Wealth Accumulation:
- Potential for Higher Returns: With investment in various funds, ULIPs have the potential to provide higher returns compared to traditional insurance policies and endowment policies.
- Transparency:
- Regular Updates: ULIP policies offer transparency in terms of fund performance, charges, and value of investment through regular statements.
- Flexibility in Fund Switching:
- Switching Options: Investors can switch between different funds based on market performance or changing investment goals without tax implications.
- Long-Term Investment Horizon:
- Discipline in Saving: ULIPs encourage long-term savings and investment discipline, aligning with goals such as retirement or child education.
- Protection Against Market Volatility:
- Fund Diversification: By choosing a mix of equity, debt, and balanced funds, investors can manage risk and potentially benefit from market growth.
- Top-up Premium:
- Top-up is a facility provided in ULIPs. This is unique to ULIPs. Top-ups are additional premiums you can add to your UILPs on a regular or ad hoc basis (subject to a certain percentage of the overall premiums paid on the policy). Regular top-up follows the current premium payment mode of the policy while Ad hoc top-up or single top-up can be done anytime one wishes. Thus one can increase the investment component of a well performing ULIP by paying an extra premium and increase their fund value without much charges attached to it.
- Partial withdrawal of amount:
- Post the minimum lock-in period, withdrawal can be made from the amount accumulated in the funds of a ULIP. So this assists to meet emergency need of fund at times of need without any tax implications. Post withdrawal the fund value stands reduced by the amount withdrawn.
Considering disadvantages of ULIPs:
- Various Charges:
- One should be aware that a ULIP has various charges like Annualized charges, Premium Allocation Charge, Policy Administration Charge, Mortality Charge, Fund Management Charge, Switching charge, Top-up premium charges and Surrender Charge.
- ULIPs and lock in period:
- Five years is the minimum lock-in period for ULIP, so if the policy is terminated by its holder, the funds will be transferred to the discontinued policies funds, also known as DP funds.
Despite the charges, the returns on ULIPs tend to be higher in the long term as compared to guaranteed plans and savings plan as investments here are made in market related instruments while the actual returns depend on the choice of fund invested in.
To summarise – While ULIPs offer several benefits like market linked appreciation in value of investment over years and tax benefit upon investing besides tax free returns on maturity (as per current income tax law), it’s important to consider the associated costs (e.g., fund management charges, policy administration charges) and carefully assess the suitability of the plan based on individual financial goals and risk tolerance.
To conclude ULIP is great product to invest in and makes for excellent investment cum risk management strategy. Use the product wisely to create a Balanced portfolio.
