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ULIPs - Unit Linked Insurance Plans

Unit Linked Insurance Plan, known in short as ULIP, is a life insurance-cum-investment scheme that allows you to save for your future while ensuring that your family is protected against your unexpected demise. ULIPs are different from endowment or money back plans in the fact that ULIP money is invested in mutual funds, bonds and stocks. You can decide what kind of investment vehicle to put their money in. Depending on the type of investment chosen, the returns on the policy could be quite high, resulting in greater savings for your and your family’s future.

Types of ULIP Plans:

There are several types of ULIP plans in India. ULIPs can be classified in various ways, such as:

  • Types of ULIPs by end use of funds: This categorising is based on the purpose for which you buy a ULIP policy. The four kinds of ULIPs under this label are –
    • ULIPs for children’s education: These policies help you save for the specific purpose of coping with your child’s tuition and other related academic expenses. ULIP Child Schemes have perks such as regular payouts to meet an educational landmark in your child’s life.
    • ULIPs for wealth creation and savings: These policies focus on increasing your investment and creating a larger corpus of savings for your future.
    • ULIPs for retirement planning: These policies help you plan for your retirement years either by giving you a lump sum at retirement or through a monthly income after you stop working.
    • ULIPs for medical emergencies: These policies focus on meeting your medical requirements in the future.
  • Types of ULIPs by funds invested in: When you buy a ULIP, you get the chance to select the kind of mutual funds that you want your money invested in. There are three kinds of funds in which ULIPs are usually invested –
    • ULIPs investing in equity funds: These type of Unit Linked Insurance Policies are invested in equity funds, which are actively traded on the stock market. The risk level is very high here.
    • ULIPs investing in debt funds: When the policy invests your money in a debt fund – which consists of instruments such as government, quasi-government securities, corporate bonds, and other fixed income instruments, the risk level is very low and a growth – albeit slow – is guaranteed.
    • ULIPs investing in balanced funds: ULIPs that invest in balanced or hybrid funds, which are a mix of equity and debt funds, it falls under this category. Balanced funds are moderate in risk level and gives higher returns than debt fund-ULIPs.
  • Types of ULIPs by death benefits: This categorisation takes into account how the death benefits are disbursed. The two main subsets under this type of ULIP are:
    • ULIPs where you get the sum assured or the fund value: Some companies offer ULIPs in which the total amount that you get as death benefits is either the total sum assured or the value of the funds in which the policy is invested. The amount you receive would be the higher amount of the two options.
    • ULIPs where you get both sum assured and fund value: ULIPs offered by some companies give the nominees of the policyholder the cumulative total of both the sum assured and the fund value as death benefits. Needless to say, these funds will be more beneficial to the family.

Best ULIP Plans in India:

Policy name Minimum entry age Maximum entry age Minimum annual premium Premium allocation charge Policy administrative charge No. of funds No. of free switches in a year
SBI Life – Smart Wealth Builder 7 years 60 to 65 years Rs.30,000 Up to 9% Up to Rs.60 per month 7 2
Reliance Nippon Life Classic Plan II 7 years 60 years Rs.20,000 Up to 7.5% Rs.40per month 5 52
HDFC Life Click2Invest ULIP 0 years 65 years Rs.12,000 NIL NIL 8 Unlimited
ICICI Prudential Smart Kid Solution 20 years 54 years Rs.45,000 Up to 6% Rs.60 per month or 2.52% of annual premium 8 NA
PNB MetLife Smart Platinum 7 years 70 years Rs.30,000 Up to 6% Rs.35 to Rs.40 per month 6 4
  • SBI Life – Smart Wealth Builder: This is a non-participating policy that gives you guaranteed additions from the 10th year of policy and waives off the premium allocation charge from the 11th year onwards. It has 7 fund choices and you can make regular premium payments, or limited payments for specific number of years, or a single lump sum payment. You get the sum assured or the fund value, whichever is higher, as death benefit, and the fund value as maturity benefit.
  • Reliance Nippon Life Classic Plan II: This non-participating policy allows you to top-up your premium payment and increase your investments. With 52 free switches, you have the freedom to change your investment pattern as per market changes. You can make a single payment or regular payments – once a year, once in 6 months or once a year. Nominees get the highest of base fund value, base sum assured and 105% of premiums paid, in addition to the highest of top-up fund value, top-up sum assured and 105% of top-up premiums paid.
  • HDFC Life Click2Invest ULIP: This is an online plan that allows you to pay premiums regularly, for limited number of years or in a single lump sum payment. This policy gives you the fund value as maturity benefit and the highest of 105% of premiums paid, fund value or sum assured as death benefit. You can switch funds among 8 different options any time throughout the year, and you have to pay only mortality and fund management charges.
  • ICICI Prudential Smart Kid Solution: This is a child-centric plan which aims at growing your investment keeping your child’s educational and career milestones in mind. The policy gives wealth boosters and loyalty additions to increase your savings. You can get a lump sum maturity benefit or staggered payments as maturity benefits, while the death benefit would be the sum assured or 105% of premiums paid, whichever is greater.
  • PNB MetLife Smart Platinum: This scheme gives you a choice of 6 funds and covers you till the age of 99. You can pay premiums for 5 years, 10 years or for the full policy period. The maturity benefit is equal to the total fund value, and death benefits would be the highest of base fund value, base sum assured minus partial withdrawals made, or 105% of the premiums paid.

Why you should buy ULIPs?

Here are some reasons why ULIPs make a great investment plan for you:

  • You can make partial withdrawals on ULIPs: Unlike some mutual funds, insurance policies and long-term savings instruments, ULIPs allow you to make partial withdrawals in case of personal monetary requirements. You can start taking out money any time after 5 policy years.
  • ULIPs are multipurpose: A ULIP is a two-in-one product – it offers both insurance protection and investment benefits. So instead of buying a term insurance and a mutual fund, you could buy a single product – a ULIP – to serve both the purposes.
  • You can choose the risk level you want: Most Unit Linked Investment Policies offer a variety of fund choices, with a good mix of equity, debt and balanced funds. You can choose the funds you want your money to be invested in, and also change the fund choices many times a year for free. Thus, you get to decide how much risk you want to put your money in.
  • ULIPs are flexible: Apart from choice of funds and option to switch between funds, you also get a choice in premium payment frequency – annual, semi-annual, quarterly or monthly – and premium payment tenure – Regular Pay, Limited Pay or Single Pay. You can choose the amount of life insurance cover you want, and the portion of premium to be invested. You can customise a policy as per your needs.
  • ULIP helps you save for the future: ULIPs are one of the best means to save money for the future – be it for your child’s education, or your retirement, or simply for a rainy day. If you choose to pay premium every month, then it will inculcate a sense of discipline in your savings pattern.
  • You can save tax through ULIPs: ULIPs are a tax-deductible product. You can save on premium payments under Section 80C, and on maturity or death benefits under Section 10 (10D).
  • ULIPs don’t charge high fees: Some of the common fees charged on ULIPs are Premium Allocation Charge, Fund Management Charge, Policy Administration Charge and Mortality Charge. Altogether, these will not exceed 2.25% of the premium you pay, as per Insurance Regulatory Development Authority of India (IRDAI). However, of late, many insurance companies give heavy discounts and waivers on different charges, thereby making ULIPs more attractive than mutual funds.

How do ULIPs work?

Unit Linked Investment Plans are very similar to endowment plans – the key difference being that investment through ULIPs are made in market instruments such as debt, equity and balanced funds.

You need to pay a premium amount, which is your contribution to the investment and insurance. A part of this amount goes into investment in funds, another part goes towards your insurance payments, and a small portion is deducted as administrative charges. You can decide your premium payment tenure from the 3 options – regular pay (where you pay premiums till the end of the policy period), limited pay (where you pay premiums for a limited period such as 5 years, 10 years or 15 years), and single pay (where you make a single payment for the entire duration). You can add riders to a ULIP policy and secure your life further, but this will mean paying a slightly higher premium. However, the benefits would be higher if you add riders to a scheme.

ULIP policies grow at a faster rate because of investment in mutual funds. The growth of the investment, however, depends on the fund you choose. If you are risk-averse you may want to go for debt funds, which are secure but give small profits. Balanced funds give moderate returns and equity funds give the highest yield of the three.

After 5 years, you will be allowed to withdraw money from a ULIP for your urgent requirements such as making down payment for a vehicle or house, or a medical exigency. Each policy/insurer will have their own limits on how much amount can be withdrawn and how frequently you can make withdrawals. If you pass away before the policy reaches maturity, your nominee can claim death benefits, and if you outlive the policy you can claim maturity benefits which would depend on how much your fund has grown.

Features and Advantages of ULIP:

It is important to know the main features and benefits of a product before buying it. The characteristics of a Unit Linked Insurance Policy are as given below:

  • Versatility: Unit Linked Investment Plans, unlike mutual funds, serves two purposes. It not only helps you save money for your future, but also offers you a life insurance cover. This will ensure that if you meet an untimely death, your family will get a higher payout than a pure term insurance.
  • Transparency: All insurance companies are mandated by the IRDAI to make the functioning of ULIPs as transparent as possible. A sales brochure of a ULIP scheme will have detailed notes on topics such as illustration of benefits and fees and charges applicable. You also get a free-look period of 15 days when you can take a policy, experience it, and return it if you don’t like it. You can also track the performance of the funds your ULIP is invested in, through the Net Asset Value (NAV) that is declared on a daily basis by the insurance company.
  • Higher returns: ULIPs give higher returns than typical savings products such as fixed deposits or money back plans. This is because ULIP investments are linked to the stock market.
  • Guaranteed returns: Because ULIPs are linked to the market, it also makes the product volatile. However, unlike mutual funds, insurance companies guarantee a certain sum as death benefit and a certain sum as maturity benefit, which means that even if the fund you invested in doesn’t do very well, you will still receive the amount promised to you at the outset.
  • Multiple premium payment options: Premiums for ULIPs can be paid in many modes, as per your convenience and affordability. You could make payments for the whole tenure of the policy, for a limited duration of the policy, or in a single lump sum payment. Regular and limited payments can be made once a year, once in six months, once in a quarter, or every month.
  • Choice of funds: ULIPs offer a choice of 2 to 8 funds – this differs from insurer to insurer and from product to product. These are a mix of equity, debt and balanced funds, which allows you to pick the risk level you want. If you are a risk-averse individual, you can choose debt funds, if you want moderate risk, you can go for a hybrid or balanced fund, and if you want to take moderate-to-high risk, you can select equity funds. You can switch your funds from one to another several times a year, and ensure a healthy gain from the investments.
  • Ease of management: You don’t need to manage your own funds if you are not comfortable with the stock market – the insurance companies’ fund managers will do the job for you. But at the same time, if you are interested and knowledgeable in fund management, you are allowed to do that in some policies.
  • Customisation of premium and payouts: You can decide how much premium you want to pay and customise the sum assured and premium allocation to funds accordingly. You can buy a ULIP for various purposes – from retirement planning to children’s education – and customise it as per your needs. You can also add one or more riders to your policy to increase your protection levels.
  • Systematic savings: ULIPs, like endowment plans, is a structured saving instrument. It will bring financial discipline to your life as you will learn to keep aside the premium amount every month or whatever your premium payment due date is.
  • Partial withdrawal: Unlike mutual funds or provident funds that have high lock-in periods, you can withdraw some part of the savings from your ULIP policy after 5 years. This will help you if you find yourself in urgent need of money at certain junctures of your life.
  • Tax savings: As discussed earlier, you can save tax on both the premiums paid and the death or maturity benefits received.

How to choose the right ULIP for you?

Before you buy a ULIP, you need to consider a lot of factors. Some of the important considerations to make before buying a ULIP are given below:

  • Investment goals: The first and foremost thing to be considered is what you expect from a ULIP. ULIPs can be purchased for several purposes such as child’s education and future needs, your retirement, savings, increasing your wealth, tax savings, etc. Once you are sure why you want a ULIP, you will be able to select a scheme that helps you achieve that goal.
  • Research: Go online and find out everything there is to know about ULIPs. You ought to learn everything about how a ULIP works, what the premium rates are like, which companies offer ULIPs, what kind of funds are there and how to choose the right fund, etc. Only when you know everything about the product you want, would you be able to make a wise purchase.
  • Comparisons: After learning everything about ULIPs and getting clarity on what your needs and affordability are, you need to look at various plans available in the market. You should compare them on certain parameters such as premium required, death and maturity benefits, fund options, fees and charges, and fund performance.
  • Premium amount, payment frequency and duration of pay: ULIP schemes are available with varying premium payment options. There are regular, limited and single premium payment alternatives. Premium amount for regular pay policies would be lower than those for limited pay plans. Single premiums would be very high though it would be a one-time payment. Monthly or quarterly payments may be more affordable to an average person than semi-annual or annual payments. So consider how much you can save per month or per year and choose the premium amount, frequency and duration accordingly.
  • Risk level: The choice of funds in a ULIP should depend on how much risk you want to take with your money. Debt funds are the best for risk-averse people, while equity funds work best for people who want fast growth and are okay with high risk. Balanced funds offer moderate risk and may be ideal for a fairly cautious investor.
  • Low fees and charges: Check the fees charged by various policies and choose the ones with lowest fees. This will ensure that your policy amount is not wasted in meeting administrative requirements.
  • Death and maturity benefits: Go for a policy that gives maximum value for your money. Ensure that both death and maturity benefits are equivalent or reasonable. Sometimes maturity benefits would be way higher than death benefits, but there is no guarantee that you would NOT die while the policy is active. So you have to ensure that death benefits are also good.

ULIP Eligibility Criteria:

Each policy will have different eligibility criteria. Some of the common parameters for ULIPs are:

  1. Entry age – Each insurer and policy will have a minimum and maximum entry age, which is the age at which you can buy the plan.
  2. Maturity age – This is the age that a policyholder should be at when the ULIP period ends.
  3. Premium payment ability – You should have the monetary ability to pay premiums as per the policy selected.

Key Terms used with reference to ULIPs (Glossary):

  • Policy Term: The duration up to which an insurance scheme offers life cover is known as the policy term. For example, if your policy is bought at the age of 25 and covers you until you are 45 years old, then the policy term for that scheme is 20 years.
  • Premium Payment Term: This is the duration for which you have to pay premiums for the policy that you have selected. The premium payment term could be for the whole policy term, for a limited tenure, or just once in case of the single pay mode.
  • Premium Payment Mode: This refers to the way in which you can make premium payments towards your ULIP scheme. This could be online, through cash or cheque, ior via standing instructions or Electronic Clearing System (ECS).
  • Lock-in Period: This is the duration for which you cannot withdraw the money you have invested in a ULIP.
  • Partial Withdrawals: This refers to the act of taking out a portion of the money you’ve invested Unit Linked Insurance Policy after the prescribed lock-in period is over.
  • Sum Assured: This stands for the amount of money that you are guaranteed to get as death benefit or maturity benefit.
  • NAV: This stands for Net Asset Value. This is the daily value of one unit of each fund you have selected for your ULIP.
  • Fund Value: This is the total value of the funds that your policy is invested in at a given point of time. For example if your policy is invested in 1000 units a fund with a per-unit value of Rs.418, then the fund value would be 418 x 1000 = Rs.4,18,000.
  • Death Benefit: This is the amount paid to the nominee of the policyholder after the latter’s death.
  • Maturity Benefit: This is the amount paid to the policyholder when the policy term is over.
  • Loyalty additions: This is an amount that is added to a policy by the insurance company as a reward of staying loyal to the brand or product. This bonus amount is usually given for long-term policies.
  • Free-look period: This is a 15 or 30-day period during which you can examine the policy, its benefits and disadvantages, and its terms and conditions. You can return the policy for a minimal fee within the free-look period if they are not satisfied with the scheme.
  • Reduction in Yield: When the policy premium is allocated to funds and returns are calculated, it is possible that sometimes due to excessive fees and charges, there might be negative returns or a loss. RIY is the loss to the policyholder if the returns on a fund are low because of the amount of fees and charges. For example, if the actual value of your fund is Rs.5,000 but due to all the various fees and charges your returns is only Rs.4,500, then there is a reduction of Rs.500 on your yield.
  • Non-negative Clawback: IRDAI has put a limit on how much RIY a fund can be subjected to. The onus of ensuring a low RIY is on the insurance company. If there is a profit when reduction in yield is subtracted from the maximum return in yield, then unit’s equivalent to that profit amount needs to be added by the insurer to the policyholders’ fund. In the end, the estimated reduction in yield should be equal to the maximum reduction in yield. This is known as non-negative clawback.
  • Lapsed policy: A policy lapses or becomes inactive if you do not pay premiums within the due date. Lapsed policies can be revived on paying a late payment fee and the premium dues.

ULIP charges:

  • Premium Allocation Charge: This is a fee that is charged every year from the premium you pay. It covers services such as cost of underwriting, distributor fees and allocation of the premium towards different fund units. This charge could range from 0.25% to 6% of the premium paid per month.
  • Fund Management Charge: This charge is levied for management of funds on your behalf, and is calculated before NAV is estimated. They are usually up to 1.35% of the NAV.
  • Policy Administration Charge: This fee is charged for administration of the policy and is appropriated from the cost of the units.
  • Mortality Charge: This is the portion of your premium that goes towards life insurance coverage.
  • Switching Charge: This fees is applicable if you want to switch your funds from equity to debt or debt to balanced and so on. This is levied only if your free switches for the year are over.
  • Surrender Charge: This charge is levied if you surrender your policy before it reaches maturity.
  • Partial Withdrawal Charge: If you withdraw some amount from the policy after the lock-in period is over, your insurance company may charge a small partial withdrawal fee.

ULIP Funds:

  1. Equity: Equity funds deal with stocks of companies and have a higher rate of growth and price fluctuation. This also makes it the riskiest fund of the three kinds.
  2. Debt: Debt funds deal with fixed-income products such as government securities and corporate bonds. The risk level is very low on this one, and the capital appreciation would not be very fast.
  3. Balanced: Balanced funds contain a mix of debt and equity products, thereby making it a moderate risk product with a chance of modest growth.

ULIP Premium Calculator:

A premium calculator is a tool offered by insurance providers that will help you determine the amount you will need to pay as premium for the life insurance cover and savings that you require for your future. Premium calculators will need you to input some or all of the following details:

  • Your age
  • Your gender
  • The life insurance cover you need
  • The policy you want to buy
  • Policy term
  • Fund details, if available

On putting in this information, the premium calculator will come up with an approximate amount that you will need to pay as premium. This amount should not be taken as an absolute. Premium calculators for Unit Linked Insurance Plans are not very common because the fund details are not always known and there are more variables than any other kinds of insurance policy.

ULIP Riders:

Many ULIPs do not give you an option to add a rider. However, some companies do give you rider choices. The following are the most common riders that insurance companies would give you alongside a ULIP scheme:

  • Term insurance rider: With this rider, you are putting a higher cover on your life, and the policy will be eligible for a higher death benefit payment.
  • Accidental death benefit rider: This rider will offer the nominee a higher amount as death benefit if the policyholder passes away in an accident. This amount is in addition to the sum promised as death benefit for the main policy itself.
  • Permanent disability benefit rider: This rider offers protection to the policyholder if they meet with an accident and become totally disabled and unable to earn for the family. The rider will ensure that you get a portion of the sum assured as a lump sum to cover the treatment. In some cases, the sum assured and bonuses would be disbursed in staggered payments so that the person would have a fixed income even if they cannot go to work because of the disability.
  • Critical illness benefit rider: If the insured person is diagnosed with a severe disease such as serious multiple sclerosis, heart conditions, kidney failure, cancer, Alzheimer’s disease or paralysis, they will get a lump sum under this rider to help pay for the treatments. Some insurance companies also waive off future premiums in case of a critical illness.
  • Premium waiver benefit rider: This rider can be added if you want the insurer to forgo the premium payments if the policyholder gets a critical disease or becomes disabled in an accident. You will continue receiving the benefits of the policy until maturity even if you are not paying the premiums any more.

ULIPs vs Mutual Funds:

The key differences between ULIPs and mutual funds are listed in the table below:

ULIP Mutual Fund
Offers both insurance cover and investment option. Offers only investment options.
Risk levels depend on the funds you choose. Risk levels depend on the funds you choose.
Returns are variable and depend on the performance of the funds chosen. But they are generally lower than that of mutual funds because of the cost of insurance coverage. Returns are variable and could be high or low depending on the performance of the funds.
Your investment amount is split between fees, insurance cover and fund growth. All your investment is utilised only for investment.
There is a lock-in period of 5 years. There is no lock-in period except for ELSS funds.
You can change your funds from equity to balanced to debt as per your choice. A certain number of free switches between funds are available every year. You cannot switch from fund to fund. To change the fund type, you need to exit from one fund and buy another.
Additional benefits such as loyalty bonus and other kind of bonuses are available. There are no additional monetary perks.
Liquidity is not very high – you can only make partial withdrawals after 5 years or surrender your policy. Liquidity is high as you can exit from a mutual fund whenever you want by selling off all the units.
Several fees and charges are applicable as there are very few restrictions set by the IRDAI. SEBI has set limits on fees and charges that can be levied on mutual funds.
Is a transparent product as all benefits and daily NAV are declared and explained. Is also transparent as fund managers have to declare all costs, benefits and daily NAV.
   
Tax benefits are available under Section 80C. There is benefit in premium payment as well as in claiming benefits. Tax benefits are available under Section 80C if the funds are in the form of ELSS. Otherwise long-term or short-term capital gains tax is applicable.
Can be either medium-term or long-term. Are either short-term or medium-term.
Is regulated by IRDAI. Is regulated by SEBI.

Myths about Investing in ULIP Plans:

Here are some common misconceptions people have about ULIPs:

  1. ULIPs are expensive: ULIPs are available as per your monetary stature. ou can choose a policy and premium as per your requirements and affordability. If you want to pay a larger premium and make higher investment and get a higher insurance cover, you can do that. And if you want to pay a lower premium, you can find a suitable scheme among the various ULIPs available in the market.
  2. ULIPs are non-profitable: While it is true that there are several charges associated with Unit Linked Insurance Plans that does not mean that all your money goes in paying the fees instead of in profitable investment. IRDAI ensures that certain fees are restricted so that you can get the most out of the policy’s investment options.
  3. ULIPs are mysterious: IRDAI mandates that all insurance providers should provide full disclosure and ensure transparency in the operation of ULIPs. This means that all the fees, benefits and perks, and deductions are outlined at the outset through the policy brochure. IF you read through the brochure carefully and ask all the right questions to the insurance agent, ULIPs will no longer appear mysterious to you.
  4. ULIPs are risky: The risk level of your ULIP depends on the funds you choose. The choice of funds is totally up to you, so the risk level is actually in your hands. If you choose debt funds the policy will be least risky, if you select balanced funds, the risk would be low-to-moderate, and only if you choose equity funds would you have to bear medium-to-high risk.
  5. ULIPs offer lower life cover: It is true that the proportion of life cover in a ULIP would be lower than a term insurance plan, but that is natural because the premium amount serves two purposes – insurance and investment – in a ULIP while in a term insurance the whole amount goes towards insurance. But you are free to choose a ULIP death benefit amount that you need for your family and you can even add riders to increase your life protection.
  6. You cannot discontinue a ULIP: Just like any insurance policy, you can surrender your policy whenever you want and close the account. If you surrender before 3 or 5 years, there might be a fee applicable, but after 5 years you don’t even have to pay a surrender charge to discontinue your policy (though this may differ from insurer to insurer). You can also make partial withdrawals from the ULIP without discontinuing your policy after a lock-in period of 5 years.