ULIP stands for unit linked insurance plans.
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The policyholder has the option to pay premium monthly, quarterly, half-yearly, or annually. Part of the premium goes to secure life and balance is invested in various funds just like a mutual fund does. Sometimes it has been termed as term insurance + mutual fund.
ULIP has been in the industry for quite some time, but in recent time ULIPs has become a preferred investment choice because of lower charges and higher transparency.
Working of ULIP
When your investments in ULIP, the insurance company would put part of the premium to provide you risk cover and the balance would be invested in Funds. You would be given the option to choose from various funds while applying for ULIP.
You would be awarded units for the money which gets invested for investment. The value of the unit is denoted by NAV (net asset value).
When you need to calculate your investment value all you need to do is:-
Investment = No of units X NAV
The fund manager of the insurance company would be responsible for managing the funds, hence you would be free from tracking your investment daily.
ULIP Best Suited For
ULIPs are specialized insurance plans and have a comparatively higher risk than traditional plans.
ULIPs are best suited for:-
a) Medium to long term investors
If you wish to stay invested in the market for anytime between 10 to 15 years, ULIP would turn out to be the best choice. It has been noted that in long ULIP have performed far better than some of the best mutual fund, with the addition of life cover.
b) Wants to access market at low risk
ULIPs are the best way to access the market at relatively low risk. There would be a dedicated fund manager who would be responsible to look after your investment. There are a wide variety of funds available which you can choose from and if required you can always Switch between these funds.
c) Those looking for dual benefits
Mutual funds provide a dual benefit of risk coverage and investment. On one hand, where your life would be covered with risk cover and on the other hand, your investment would continue to grow. Thus mutual fund provides you both savings and investment. You can also claim tax benefit (up to 1,50,000 INR, under section 80c)
d) Those who looking for flexibility
If you are one who is looking for flexibility ULIPs are the best option you have the option to stop your committed investment post 5 years without harming any of the benefits. You have the option either to take all your money or opt for partial withdrawal, i.e. taking only part of the investment.
Benefit of ULIP
In recent years, there is a growing interest in ULIPs as a preferred investment option. The major reason for the same is as under:-
a) Life cover / Risk cover
The most important, with ULIPs you get a life cover coupled with investment. It offers security in the form of life cover, that an investor’s family can fall back on in case of emergencies like the untimely death of the investor.
b) Income tax benefits
You are eligible to claim income tax benefit under section 80 (c). The maximum limit for such a rebate is 1,50,000. Also, the maturity is also exempted from income tax under Section 10(10D). So you have a dual benefit, no tax while investing, and also no tax on maturity.
c) Finance Long Term Goals:
If you have long-term goals like buying a house, a new car, marriage, etc., then ULIP is a good investment option. The returns generated in ULIPs are far better than traditional insurance plans and in some cases even better than best mutual fund schemes. Though you have the option to exit after 5 years, it’s always advisable to stay invested for the long term.
d) The flexibility of a portfolio switch
ULIPs have generally 5 to 6 different kinds of funds to choose from. Based on your risk appetite you can choose one. You also have the option to move your investment from one fund to another at no cost and have had the flexibility to change your premium paying option, you can change from yearly to monthly, quarterly as per your need and financial position.
You can also increase your investment in ULIPs by way of top-ups. This way you need not get into the hassle of starting a new investment.
e) Discipline and regular saving
ULIPs would help you in having a habit of regular investment, which in the long run would be built into a good portfolio.
Disadvantages of ULIP
Though there are lots of benefits of ULIP as has been discussed in preceding lines, there are some disadvantages also attached to it. Few of the disadvantages of ULIP investment are as under:-
a) Expensive and complex
Though it has been mentioned that ULIP are a combination of protection and investment i.e. combination of Mutual funds and insurance. Its never been mentioned explicitly as to how much money would be allocated to investment and how much for risk cover. Also, the charges for risk cover generally increases with age, so left little for investment.
c) High cost in initial years
The charges on ULIP are very high in initial years. They cost more because of the charges that are levied on the investors. Also in the initial year, the company needs to pay a high commission to the agent for bringing in the investor. The charges are also high as the company needs to ensure coverage to the policyholder.
d) Returns not fixed
The returns of the ULIP are not fixed and fluctuates with the market. Though there are various funds where in you can park your investment and diversify the risk, yet it’s not possible to find the return.
e) Lock-in period
In ULIPs there is a lock-in period of five years, which means in initial five years you cannot access your funds. During this time period you cannot take any partial withdrawal from the fund.
f) Switches limited & chargeable thereafter
Though insurer provided the facility to switch between funds. The option is generally limited and would cost a good amount once it crosses the free switches.
Types of ULIPs
ULIPs plan can be classified based on different parameters. The important among these are
a) Based on sales point
ULIPs can either be purchased traditionally i.e. from the broker or agent or directly from the company known as a direct plan. Both have their pros and cons. The direct plans are generally cheap as the middle man i.e. agent or broker gets eliminated and the company saves on commission part.
b) Based on term
A ULIP can be either with a single premium or regular premium option. In a single premium option, you need to invest just once and enjoy the benefit over a chosen period. On the contrary, in the regular option, you are required to pay regularly till the chose time.
Generally, you opt for a single premium when you need to invest a large amount or you have got some funds like a bonus. In most of the cases, these funds are of non-recurring nature. You also save yourself from keeping a reminder of renewal payment.
A Regular premium is best when you want to build wealth in small steps. You can opt for yearly, quarterly, or even monthly payments.
c) Based on death benefit.
Based on death benefits ULIPs can be either Type l or Type ll
- Type I ULIP
Type l ULIP pays higher of the sum value value or the fund value to the nominee in case of death of the policyholder.
2. Type II ULIP
Type ll ULIP pays sum assured value plus the fund value to the nominee in case of the death of the policyholder.
Tax Benefit in ULIP
The investment made in ULIPs can be used to claim tax deduction under section 80c of the income tax act. The maximum limit for the same is 1,50,000 INR.
Also, the returns from the policy either on maturity or death claim are exempt from taxation under section 10(10(D)) of the income tax act.
Fund options in ULIP
When you invest in ULIPs a part of the premium goes in investment. There are various funds available with the insurer, and you need to choose one or more as per your need and requirement. The different insurer has different names, but the basic principle remains the same. The various funds are as under.
a) Equity funds
Such ULIPs invest most of its funds in equity or equity-oriented assets like stocks of various companies. There is very little or no exposure in debt fund.
b) Debt funds
ULIP plans which invest the premiums in debt instruments or money market instruments, government securities, bonds and likewise.
c) Balanced funds
The premiums are invested in a combination of equity and debt market instruments.
d) Cash funds
If you don’t wish to take too much risk, then you can invest your money in a cash fund. In this, your savings are directed towards money market instruments such as cash deposit, short term investment, bank accounts, and market funds, etc.
Fees and Charges
In every investment, there are various charges that need to be paid. These charges are required to service various functions and to pay various stakeholders associated. ULIPs have broadly following charges:
a) Premium Allocation Charge
Premium Allocation Charge is deducted as a fixed percentage from the premium paid in the initial years of the policy. This is charged at a higher rate in the initial years.
The charges include the initial and renewal expenses. This also includes commission expenses that need to be paid to the concerned advisor. It is a front-load charge as it is deducted from your premium paid.
b) Mortality Charges
In ULIP a part goes for your insurance cover. This charge provides for insurance coverage. Mortality charges depend on a number of factors like age, the sum assured, etc., and are deducted on a monthly basis. The mortality charges generally increase with age. High mortality takes away investment share, hence ULIP is not advisable at old age.
c) Fund Management Charges
Fund Management Charge or FMC is the fee to manage your funds. It is deducted before arriving at the NAV figure. The maximum charge allowed is 1.35 percent per annum of the fund value and is charged daily.
Generally, insurers levy the maximum amount allowed in equity funds, while the charge debt funds are much lower.
d) Partial Withdrawal Charge
ULIPs have the option of partial withdrawals of funds, meaning you can withdraw some of the funds from the policy without affecting any of the benefits. Some plans offer unlimited withdrawals, but some restrict it to 2-4 withdrawals.
These withdrawals can be free for up to a certain limit or you can be charged based on your transactions. Different insurance companies charge a different amount.
e) Switching your funds
Your investment in ULIP gets invested in various funds. You have the option to move your investment between various funds. This is known as switching. There are options to switch your funds for free up to a certain limit per year. Any further changes might incur a charge of INR. 100 -Rs.250 per switch. It depends on company to company.
f) Policy administration charges
This charge is levied for the administration of the policy and it is deducted on a monthly basis by the cancellation of units from all funds chosen.
Best ULIP plans of 2020
There are numerous options available and every insurance company is having its own set of ULIP’s available meeting different needs. A few of the mentioned are some of the best available. We have chosen considering various charges and past growth.
|ULIP Plans||Entry Age||Minimum Premium||Premium Allocation Charge||Policy Admin charge||No. of free switches in a year|
|Bajaj Allianz Future Gain||1 to 60 years||Rs 25,000 PA||0% to 2.5%||Rs 33.33 per month||Unlimited|
|HDFC click 2 wealth||30 days to 60 years||Rs 12000 PA||Nil||nil||unlimited|
|MAX Life Fast Track Growth Fund||18 to 50 years||Rs 25,000 to Rs 1 lakh||2%(Single Premium) to 4% (Annual premium)||Rs 1,500 per year||12|
|SBI Life Wealth Assure||8 to 65 years||Rs 50,000||3% of Single Premium||Rs 45 per month||2|
|PNB Metlife Smart Platinum||7-70 years||Rs 30000 INR||Maximum 6% After 11 years – 0||Rs 40 PM||4|
ULIPs are specialized plans and are not for every investor owning to market link returns. In the recent past, due to high returns, there has been an increase in its demand. These plans offer flexibility with high returns.
You should do your thorough research before investing in ULIP.
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