Unit Linked Insurance Plans better known as ULIPs are products marketed and sold by various Insurance companies. This product gives the dual benefit of investment opportunity along with Insurance coverage. The quantum of premium paid is allocated in such a manner that a part of it goes into different funds for the purpose of investments offered to the investor and part of the premium paid is kept to cover the life of the investor. ULIPs offer death benefit to the investor, i.e. if the investor expires during the tenure of the policy, the nominee gets the sum assured or the fund value whichever is higher.
For example, Mr. Mehta takes up a ULIP policy from XYZ company and pays an annual premium of Rs. 50000 for a policy term of 10 years. The company has offered him an insurance coverage of 10 times the regular annual premium paid, which means his sum assured is Rs. 500000.
Scenario 1: Mr. Mehta meets an accident after payment of 3 premiums.
In this case, though Mr. Mehta paid just 3 premiums that add up to Rs. 150000 and the fund value on the date of the claim is Rs. 170000, his nominee would get Rs. 500000. Since higher of the sum assured or fund value is paid to the nominee in the event of death of the policyholder.
Scenario 2: Mr. Mehta dies of heart attack after paying 9 premiums.
In this case, the premium paid till date of claim is Rs. 450000, the fund value stands at Rs. 595000. Though the life cover was for Rs. 500000, the nominee of the deceased is entitled to get higher of the sum assured or fund value. In this scenario, as the fund value is higher; the nominee gets the fund value.
Scenario 3: What happens in the event of surrender or maturity?
In case the life assured surrenders the policy or withdraws it on maturity, the fund value as per the current market value is paid out. As it is a market-linked product that invests in equities, the returns are not guaranteed with ULIP investments.
In a ULIP product, an individual enjoys tax benefit at the time of investments U/S 80C to the extent of the maximum tax-deductible value of Rs. 150,000; the returns are totally exempted from tax U/S 10(10D). To get complete tax exemption the mandatory life coverage should be a minimum of 10 times the annual premium, or else the tax benefit stands at just 10% of sum assured u/s 80C and the Section 10(10D) benefit is not applicable.
In ULIPs, an individual enjoys the benefit of switching between funds such as Equity Fund, Debt Fund, Hybrid fund or Money market fund etc. This gives an individual the liberty to switch funds and time the markets in order to get rewarded as a result of market churning. And the profit that an individual generates is also exempt from taxation. Switching may come for a charge and the number of times you are allowed to switch is also dependant on individual policies.
When ULIPs were first introduced, they were often misunderstood and this led many investors to believe that were going to receive high returns, but that did not come to fruition. But ULIPs have come a long way since then. With the passage of a new bill and a resulting amendment made by the IRDA, the Insurance Regulatory, and Development Authority in 2010, these charges have been capped at a maximum 2.25%. Allocation charge along with policy administration charge cannot exceed this capping. And the fund management charge cannot exceed 1.35%. This is change makes ULIPs quite lucrative as the charges are less than many mutual funds. The direct ULIPs offered online are proving to be great options for investors. And as far as the mortality charge is concerned it starts diminishing year on year premium payment, as the risk of the Insurance company starts decreasing with premium inflow.
ULIPs come with a lock-in period of 5 years; hence no surrender is permitted during this tenure. Even if someone stops the premium payment or tries to surrender the policy, the payout is made only after completion of 5 years.
So in the current scenario investing in ULIPs is a great idea if someone is looking for long term investments along with tax and investment benefit. The time horizon should be at least 10 to 15 years to see a return that can beat inflation. As the fund managers know that there would not be any redemption pressure despite market ups and down they can churn and manage funds efficiently and generate high growth in the long term.