ULIP (Unit Link Insurance Plan)

ULIP (Unit Link Insurance Plan) is an investment product that allows investors to claim a deduction under section 80C of the Income Tax Act. It combines insurance coverage with investment opportunities, aiming to provide wealth creation along with life insurance. Understanding ULIP is crucial for candidates preparing for banking and finance competitive exams.

How does ULIP work?

Under a ULIP, the insurance company allocates a portion of the investment towards life insurance, while the remaining amount is invested in a mutual fund based on equity, debt, or a combination of both, aligned with the investor’s long-term financial goals.

Individuals opting for ULIP make regular premium payments. A part of these premiums goes towards the insurance coverage, while the remaining portion is pooled with assets from other policyholders and invested in bonds, equities, or a combination of both.

Benefits of ULIP

ULIP offers a unique blend of insurance and investment, making it an attractive option for investors seeking both financial protection and wealth accumulation. Some of the key benefits of ULIP include:

• Tax benefits: ULIP premiums qualify for tax deductions under section 80C of the Income Tax Act, up to a specified limit. Additionally, the maturity proceeds and death benefits are also tax-free, subject to certain conditions.

• Life insurance coverage: ULIP provides life insurance coverage, ensuring financial security for the policyholder’s dependents in case of an unfortunate event.

• Investment opportunities: ULIP offers the opportunity to invest in various market-linked funds, allowing investors to potentially grow their wealth over the long term.

• Flexibility: ULIP policies offer flexibility in terms of premium payment options, fund allocation, and the ability to switch between funds based on changing investment goals.

Latest update on ULIP taxation

The Union Budget 2021 amended the taxation rules for ULIP maturity proceeds. For new ULIP policies availed on or after February 1, 2021, with an annual premium exceeding INR 2.5 lakhs, the maturity proceeds will be taxable on par with equity-linked mutual fund schemes. This change aims to bring parity in the taxation of ULIPs with other investment products.

ULIP is a versatile financial instrument that offers a combination of insurance and investment opportunities. By understanding the features, benefits, and tax implications of ULIP, investors can make informed decisions to align their financial goals with their risk tolerance and long-term investment objectives.

Who should invest in ULIP?

ULIPs are suitable for individuals who:

• Have a long-term investment horizon (at least 5 years)
• Are willing to take on some risk in order to potentially earn higher returns
• Are looking for a combination of investment and insurance in a single product

How to choose the right ULIP?

When choosing a ULIP, consider the following factors:

• Your investment goals and risk tolerance: Determine your long-term financial goals and assess your risk appetite to choose a ULIP that aligns with your needs.
• Fund performance: Research the historical performance of the underlying funds offered by the insurance company to make an informed decision.
• Charges and fees: Understand the various charges and fees associated with the ULIP, such as premium allocation charges, fund management fees, and surrender charges.
• Claim settlement ratio: Look for an insurance company with a high claim settlement ratio, which indicates its track record of promptly settling claims.

By carefully considering these factors, you can choose the right ULIP to help you achieve your financial goals while also securing your loved ones’ future.

Types of Unit Linked Insurance Plans (ULIPs)

There are various types of ULIPs available to cater to different investment preferences and risk appetites. Some common types of ULIPs include:

1. Equity-oriented ULIPs:

• These ULIPs primarily invest in equity markets, offering the potential for higher returns but also carrying a higher level of risk.

2. Debt-oriented ULIPs:

• These ULIPs invest predominantly in debt instruments, providing steady returns with lower risk compared to equity-oriented ULIPs.

3. Balanced ULIPs:

• These ULIPs strike a balance between equity and debt investments, offering a moderate level of risk and return.

4. Child ULIPs:

• These ULIPs are specifically designed for children, providing life insurance coverage and investment opportunities for their future education and other expenses.

5. Retirement ULIPs:

• These ULIPs are tailored to help individuals save and invest for their retirement, offering regular income and life insurance coverage during the retirement phase.

When choosing a ULIP, it’s crucial to carefully consider your investment goals, risk tolerance, and financial situation to select the most suitable plan that aligns with your long-term objectives.

Types of ULIP fees & charges

There are myriad kinds of fees and charges involved in every investment. As far as the ULIP is concerned, the fees and charges can be broadly understood as:

Premium Allocation Charges

• It is deducted as a fixed percentage from the premiums paid during the initial years of the policy.
• It is charged at a higher rate.
• The charges include expenses like the initial, renewal, and intermediary commission, etc.
• The premium allocation is a front load charge deducted from the premium paid.

Mortality Charges

• It is to provide for the insurance coverage under the ULIP.
• The mortality charges are based on various factors like the policyholder’s age, sum assured, etc.
• These charges are deducted on a monthly basis.

Fund Management Charges

• It is the fees imposed by the insurance company for managing the various funds in the Unit LIP.
• It is deducted before arriving at the net annual value (NAV).
• The maximum charge allowed is 1.35% p.a. of the fund value and is charged on a daily basis.
• The insurance company levies the maximum amount allowed in equity funds, while the charge on non-equity funds is much lower.

Partial Withdrawal Charges

• Partial withdrawal of funds is available under ULIP. While some plans offer unlimited withdrawals, a few restrict to only 2 to 4.
• These withdrawals can be free for up to a certain limit or the policyholders can be charged based on their transactions.

Switching Funds Charges

• When the funds or the investments are moved between them it is called switching.
• There are options to switch the funds for free up to a certain limit every year.
• Any further switching of funds might invite a charge of INR 100 to INR 250 per switch.

Policy Administration Charges

• These charges incur for administration of the policy and deducted on a monthly basis by the cancellation of units from all the chosen funds. Such charges are levied at a fixed rate or as a percentage on the premium.