Ulips or Unit Linked Insurance Plan help you to serve two goals in a single product: investment and insurance. It provides you a life cover and also lets you reap the benefits of the stock market, debt funds, or both, as the case may be. Ulips have come a long way since their inception in 1971. The first Ulip was introduced by the Unit Trust of India (UTI) in 1971 and then by Life Insurance Corporation (LIC) in 1989.
Ulips are products that provide you with a combination of a life insurance policy and also an investment opportunity through a mutual fund in a single plan. Ulips are provided by life insurers so your payments to these companies when you buy a Ulip plan are called ‘premiums’ as primarily Ulips are more similar to insurance plans.
A portion of your premium is diverted towards the investment bit, which is the mutual fund portion: equity, debt, hybrid, or as the case may be. There are fund managers who look after your investments. You are also allowed to switch between different types of funds to make the best ulip plan for yourself.
A Unit Linked Insurance Plan comes with a lock-in period of five years. However, Ulip being a combination of a life insurance policy and a mutual fund, both of which are long term investments, should be held for 15 years or more.
There are mainly five charges associated with a Unit Linked Insurance Plan.
The categorization of ulips depends on the type of mutual fund associated with the product. There can be roughly 3 kinds of Ulip funds:
The risk associated with Ulip plans will depend on the type of fund attached to it. For example, an equity fund is riskier than a debt fund while a balanced fund shares the risk between the mix of equity and debt portfolios. The Ulip plan will carry the risk factor accordingly. Ulips are also riskier when compared to other investments. For example, ELSS, which also falls under 80 C, is a more diversified investment and is less risky.
If you compare Ulips to a standalone insurance plan or a mutual fund product, then the former will carry greater risks. Here’s why. The cost structure of Ulips makes it expensive and it becomes difficult to get returns that will cover you for the costs and help you add extra over and above that. Considering that Ulips are more expensive, we can say that the risk factor is on the heavier side.
The investment made in Ulips can be used to claim tax deduction under section 80C of the income tax act to a limit of Rs 1.5 lakh. Apart from this, the returns from the policy are exempt from taxation on maturity under section 10 (10D) of the income tax act.
Long term goals: Given that the charges are high in Ulips and it invests in equities, a Ulip product is bound to be held for a long period of time to get the benefits of the markets. This means ULIP may be a product to consider only when you want to achieve long term goals
like buying a house in the future, marriage, higher education of children, retirement, etc and liquidity is not a concern.
Switching: Ulips gives you the liberty to switch between equity, debt, or mutual funds during the tenure of your Ulip plan to suit your requirements.
Tax benefits: While the investment made in Ulips is eligible for deduction under section 80(C), the returns from the policy are exempt from taxation on maturity under section 10 (10D) of the income tax act
Benefits of standalone plans: All advisors are on board with the idea that if you buy life insurance and a mutual fund plan separately then the chances of you getting the real benefits of both these products are way higher than a Ulip, even after accounting for the investment you make in each of them.
Returns are compromised at times: Ulips may earn good returns for you due to the investment element but the long series of high charges at times compromise the returns in the end.
Volatile returns: Returns are also very volatile in Ulips but that goes with any investment that has an equity element in it.
|1.||Lock-in period||Five years||Three years||15 years|
|2.||Tax benefits||80C and returns from policy on maturity are exempt under section 10 (10D).||80C||80C and maturity amount is exempt from taxation too|
|3.||Taxation||Gains are taxable depending on the underlying asset||Gains above Rs 1 lakh in any given financial year is taxable under LTCG at 10%||None|
|4.||Underlying assets||Equity, debt and balanced||Equity||Fixed-income oriented|
|5.||Risk (when compared to each other)||Highest among the lot||Not as risky as Ulips||Considered risk-free with guaranteed returns as it is backed by the government|
|6.||Charges||There are at least five charges in Ulips:
||Expense ratio is mostly in the range of 1.05 to 2.25%. Very few plans have an expense ratio of more than 2.25% and may range up to 3% or more.||One-time account opening charge of Rs 100|
Things to keep in mind before investing in Unit Linked Insurance Plan are not different from parameters that you need to consider before investing in any instrument.
Finances and goals: First and foremost you need to assess the funds you have at hand and what is goal you want to achieve through this investment. You should consider investing in Ulips for long term life goals any other life goals that don’t require premature withdrawals or redemptions. The charges levied, in that case, will neutralize your gains or make them negative in some cases.
Risk appetite: Assessing your personal risk appetite will help you to know which Ulip should you go for: an equity fund Ulip will carry a higher risk than a debt-fund Ulip.
Charges: It is essential for you to do proper research on the product and look at all the charges levied to understand where do your affordability lie.
Do keep these things in mind, do your research and consult your advisor before investing in Ulips.