Traditional products such as term plans and endowment plans have long ruled the insurance market. With the opening up of the sector, Unit Linked Insurance Plans (ULIPs) have become quite popular. What differentiates ULIPs from other traditional insurance plans is the fact that ULIPs are a perfect blend of both insurance and investment. ULIPs invest a part of your premium in the capital market based on your risk profile through a variety of fund options and also offer you insurance cover. Hence you get coverage against a medical hazard and can grow your wealth with a single plan.
Some of the key benefits of ULIPs are as follows:
- A ULIP is a flexible investment option.
- A ULIP is a transparent investment.
- A ULIP has lucrative tax benefits associated with
- In case of adverse circumstances as per the terms of a ULIP, you can make a partial
- It is a systematic investment option.
Here are certain interesting things you should know about ULIPs
Under Section 80C of the Income Tax Act the premiums you pay are eligible for a deduction of up to the limit of Rs.1,50,000 from your taxable income. In a scenario of policyholder’s death, the amount received by the nominee/nominees is completely tax-free in their hands. As per Section 10 (10D), the maturity of the ULIP is also totally tax-free in the nominee’s hands and the policyholder’s hands. The growth of your money is not taxable. If you are making switches, then you can make absolutely tax free debt equity switches.
Costs Involved in ULIPs
ULIPs come with certain expenses. Some such expenses are as follows:
- Premium Allocation Charge: The premium allocation charge is directly deducted from your premium payment. Premium Allocation charge is deducted to meet the insurer’s costs in relation to the marketing and the distribution. In the initial years of the policy, these charges are on the higher side and post the third year of the policy purchase it reduces gradually.
- Policy Administration Charge: Policy administration charge is levied on a monthly basis, towards the maintenance of the policy. Under this head costs such as premium intimation and paperwork are covered. This could be a flat charge throughout the tenure of the policy or increase at a pre-determined rate. It also could be a flat rate during the first few initial years and then increase by a fixed percentage each year.
- Mortality Charge: Mortality charges are charges allocated towards the cost of providing life insurance cover to the policyholder. Mortality charges are variable charges and are heavily dependent on the mortality rate of the insured.
- Fund Management Charges: Charges levied towards the management of your fund are called fund management charges. This is usually deducted before the calculation of Net Asset Value (NAV). The fund management charge is levied as a percentage of the asset value. It usually ranges from 0.5% to 2%.
- Surrender Charges: If you chose to opt for a premature encashment of the ULIP in part or full a surrender charge may be deducted. The surrender charge is calculated as a percentage of the annualized premiums or as a percentage of the fund. This depends on the terms and conditions associated with the scheme. If the ULIP is surrendered within the first three years, the insurance coverage will get ceased instantly. However, the surrendered value will be only be paid after the completion of three years. Some insurance policies also offer the insured the option of partial withdrawal or part surrender after the completion of three to five years. This kind of a surrender option comes without a cost and without making any reduction in the insurance coverage.
Since a ULIP is a flexible option, ULIPs switch option allows you to change the ratio of the funds invested in equity or debt on the basis of the risk exposure and investor’s risk appetite. When the market performs well, you can invest in equity funds, and when times are uncertain, you can invest in various debt instruments as per your discretion. You can reap the benefit of maximum wealth generation by exercising the ULIPs switching facility. The switching facility comes without any tax penalty. Most of the ULIPs doing the rounds of the financial market offer a few free switches each year. After that, a nominal fee is charged to make the switch.
Top Up Facility
ULIPs permit its customers to increase the amount of their investment. This is termed as the top up facility in a ULIP. The customers can exercise the option of adding an amount over and above the current value of the policy. The cherry on the icing is that you can also claim tax benefits on such top-ups. If you notice that what you have paid for is performing well, then you can simply add surplus funds over and above the original premium you had initially chosen to pay and hence participate in the growth of the fund.
Lock In period
Most of the ULIPs come with a minimum lock-in period of five years. As per the terms and conditions of the policy, the lock-in period can be increased. No liquidity is offered till the completion of the lock-in period. After the lock-in period is completed you are permitted to withdraw your money anytime you want. The investor is paid back his/her money once the lock-in period is over after the deduction of discontinuance or surrender charges applicable to their plan. The insurer does not have the right to deduct any charges except fund management charge before the completion of the lock-in period.
ULIPs’ are long term investment plans. You shall reap maximum benefits if you stay invested until maturity. If you are looking for short term investment vehicles in order to earn quick gains, then ULIP is not the right investment option for you. ULIPs stand out among different other investment vehicles because they can be customized as per your requirement and you can conveniently use the add on benefits associated with it to your sheer advantage.