Unit-Linked Insurance Plans or ULIPs as referred popularly have been in news ever since the Union Budget 2018. After Finance Minister Arun Jaitley announced 10 percent Long-Term Capital Gains tax on gains of above Rs 1 lakh on stocks and equity-oriented mutual funds, life insurance companies have been projecting ULIPs as a good investment option since the new tax would not apply to it.
However, is the tax element the only reason why you should invest in ULIPs? Ulips provide market-linked returns while a portion of your premium goes into providing life insurance cover also. There are other features which ULIPs offer as an investment option that you should know while taking a call on investing.
Here are some features of ULIPs:
Double benefits of I-I
With Insurance cover plus Investment (I-I) option, ULIPs not only give your family protection throughout the policy term but also provide returns on investment portion at the time of maturity. An allocated amount from the overall premium is invested into a mix of equity and debt, helping investors to fulfil their long-term financial goals.
Triple (E-E-E) product
ULIP funds allow its customers the benefit of EEE (Exempt-Exempt-Exempt) mode. This means that the customers are eligible for tax deduction during the investment, earnings and withdrawal stage. The premiums paid can be claimed as deductions from the taxable income during the year subject to the provisions of the Income Tax Act. This means that the investment one makes into ULIPs is free of the tax burden.
Santosh Agarwal- Head of Life Insurance, Policybazaar.com said as opposed to the 10 percent long-term capital gains (LTCG) tax on earnings exceeding Rs 100,000 from mutual funds as per the provisions of the Union Budget 2018, ULIPs customers do not have any tax on the income earned each year from the ULIPs they pay for. “The final phase involves the withdrawal stage where the customers withdraw the earnings along with the money they had invested. The maturity amount earned or the sum assured disbursed in case of any mishap is again exempt from tax,” he said.
Top-up facility available
ULIPs also allow its customers to increase the amount of investment. This facility is called the top-up facility as the customers get to put an added amount over and above the existing policy. You can even avail tax benefits on these top-ups too. “If the customers find that the fund they had originally paid for is performing well, they can put in surplus funds over and above the regular premium they had initially chosen to pay and, thereby, participate in the growth of the fund,” said Agarwal.
Switching option allows you to change the ratio of invested amount where you can shift your funds from equity exposure to debt or hybrid fund as per the risk exposure at different life cycle phases. Not only this, investors risk appetite too decides how much of the allocated amount would be invested into equities, while the rest should get invested in debt instruments.
Anoop Pabby, MD & CEO, DHFL Pramerica Life Insurance said that ULIPs are the only financial instruments that give flexibility to the customer to safeguard their investments from market fluctuations by allowing them to move monies from equity to debt or vice-versa at any time. This facility is called ‘switching’ in Life Insurance parlance, where the customer can choose to switch partial or entire invested amount from one fund to another without any tax penalty. This unique feature is non-existent in mutual funds, additionally, there might be tax implications on moving monies before a certain time period. “Customers who actively track capital markets can exercise this feature available with their ULIP plan at the ease of sitting at home or by visiting nearest branch. Most ULIPs provide some free switches in a year,” he added.
There are around 5 charges involved in ULIPs - premium allocation charges, policy administration charge, mortality charge, fund management charge and surrender charge.
Naval Goel- CEO and Founder of PolicyX.com said that in the initial days, the premium allocation charge would be high as it meets the insurer’s costs related to marketing, underwriting, managing of funds etc. The administration charge is deducted on a monthly basis and is levied towards the maintenance of ULIPs. Mortality charge is the cost allocated to provide life insurance cover to the policy-holder. This is a variable charge and is greatly dependent on the mortality rate of the insured. Fund management charge is in the range of 0.5-2%, so this does not impact big time as the returns expected are quite higher.“In the initial years the charges are likely to be higher but it will be worth if you are looking at it from a long-term investment perspective as later on the charges would be low and the returns would be higher.
For a long-term ULIP, people should not bother about these charges as the kind of returns ULIP give in long-term should be able to recover all the charges borne in initial years. Moreover, earlier the charges of ULIPS were high but after new regulations by IRDAI, it stated that ULIPs will be capped at 3%, it is now quite easy for investors to invest their money as they will pay lower expenses and this will result in higher returns," said Goel.
ULIPs mostly comes up with a minimum lock-in period of 5 years. This period can be increased further as per the policy terms and condition. Manik Nangia- Director Marketing and Chief Digital Officer, Max Life Insurance said that the minimum lock-in period is 5 years for ULIPs. One may choose to discontinue completely and not opt to revive by paying premiums even within lock-in. However, in such cases, the accumulated corpus is moved to a discontinuance fund which all insurers are mandated to keep and provide returns to the customer. The purpose of discontinuance fund is to hold one's money from the lapsed policy till the lock-in period is over.“No liquidity is offered during the lock-in period. However, after the lock-in period is over, you are allowed to withdraw your money anytime you want. The money will be paid out to the customer after the 5-year lock-in and after deducting surrender/discontinuance charges applicable to the respective plans. The insurers can't levy any other charge except a fund management charge until the lock-in period is over,” he said.