A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan. Unit Linked Plans refer to Unit Linked Insurance Plans offered by insurance companies. These plans allow investors to direct part of their premiums into different types of funds (equity, debt, money market, hybrid etc.)

History

The first ULIP was launched in India in 1971 by Unit Trust of India (UTI) With the Government of India opening up the insurance sector to foreign investors in 2001 and the subsequent issue of major guidelines for ULIPs by the Insurance Regulatory and Development Authority (IRDA) in 2005, several insurance companies forayed into the ULIP business leading to an over abundance of ULIP schemes being launched to serve the investment needs of those looking to invest in an investment cum insurance product.

Working Principle

A ULIP is basically a combination of insurance as well as investment. A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) in varying proportions just the way it is done for mut3ual funds. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and appetite. Just the way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.

Features

ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.

Types

There are a variety of ULIP plans to choose from based on the investment objectives of the investor, his risk appetite as well as the investment horizon. Some ULIPs play it safe by allocating a larger portion of the invested capital in debt instruments while others purely invest in equity. Again, all this is totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.

Charges

Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that are deducted from the payable premium The notable ones include policy administration charges, premium allocation charges, fund switching charges, mortality charges, and a policy surrender or withdrawal charge Some Insurer also charge “Guarantee Charge” as a percentage of Fund Value for built in minimum guarantee under the policy.

Risks

Since ULIP returns are directly linked to market performance and the investment risk in investment portfolio is borne entirely by the policy holder, one needs to thoroughly understand the risks involved and one’s own risk absorption capacity before deciding to invest in ULIPs.

Providers

There are several public and private sector insurance providers that either operate solo or have partnered with foreign insurance companies to sell unit linked insurance plans in India. The public insurance providers include LIC of India, SBI Life and Canara while some of the private insurance providers include ICICI Prudential, HDFC Life, Bajaj Allianz, Aviva Life Insurance and Kotak Mahindra Life.

Which Investor Class Are They Most Suited For?

  • Those who wish to closely track their investments:Unit linked plans allow policy takers to closely monitor their portfolios. They also offer the flexibility to switch your capital between funds with varying risk-return profiles.
  • Individuals with a medium to long term investment horizon:ULIPs (Unit Linked Plans) are ideal for individuals who are ready to stay invested for relatively long periods of time.
  • Those with varying risk profiles: Across the seven funds offered, the equity component varies from zero to a maximum of 100 per cent. Thus there is a choice of funds available to all types of investors – from risk-averse investor to those investors who have strong risk appetite.
  • Investors across all life stages: This plan category offers a variety of plans which can be opted for depending upon the life stage you are in and your needs and financial liabilities at that point in time.

Advantages

a. Liquidity

Unit Linked Plans have limited liquidity. One needs to stay invested for a minimum period of time as specified in the policy before redeeming the units.

b. Flexibility

Unit Linked Plans give you flexibility to invest as per your risk profile, financial commitments and convenience. You can choose to invest either in equity, or in debt or in hybrid fund and even change your investment strategy. Unit Linked Plans offer you a wide range of flexible options such as

  • The option to switch between investment funds to match your changing needs.
  • The facility to partially withdraw from your fund, subject to charges and conditions.
  • Single premium additions to enable the policy holder to invest additional sums of money (over and above the regular premium) as and when desired, subject to conditions.
c. Market linked returns: Unit linked plans give you an opportunity to earn market-linked returns as part of the premiums are invested in market linked funds which invest in different market instruments including debt instruments and equity in varying proportions.
d. Life protection, Investment and Savings: Unit linked plans offer the twin benefits of life insurance and savings at market-linked returns. Thus, you have the opportunity to invest your money to earn higher returns, while taking care of your protection needs. Investing in unit linked plans helps to inculcate a regular habit of saving and investing, which is important for building wealth over the long term.

e. Tax benefits

All Unit Linked Plans offer tax benefits under section 80C  upto a maximum of Rs. 150,000/-

Disadvantages of Investing in ULIP

  • Combines investment with insurance: First disadvantage of ULIP plan is that, the insurance plan and an investment plan both are merged into single ULIP plan. One should keep insurance and investments away from each other. Take a term insurance and invest in mutual funds.
  • You lose a lot of amount as entry load in ULIPs which take a minimum of 5 years to recover.
  • Mutual Funds are completely transparent whereas ULIPs are not.
  • If you want to really benefit something out of ULIPs then you have to invest in it for 10-15 years.
  • The insurance part of the ULIP costs too much.
  • ULIP is quite a long term instrument as their lock in period is 3 – 15 years.
  • Premium allocation charge, mortality charge, fund management charge and many more hidden costs are very high.
  • Complexity: ULIPs plans are more complex as compared to Mutual Funds and other investment plans.
  • Low returns: Mutual funds and investment plans have more returns as compared to ULIPs during a period of time

(Republished with amendment on 09.11.2015)

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8 responses to “All About Unit-linked insurance plan (ULIP)”

  1. rochak sachan says:

    Hii

  2. rochak says:

    Some ULIP give more return like 30% & above with life insurance. Then why it’s not good . Tell me pls

  3. Sujit Talukder says:

    Where is the tax treatment analysis?
    It appears that this article is only to advocate the investment in ulip rather than presenting an unbiased critical analysis.

  4. Makhanlal Jhaver says:

    Pl inform the status of provision of Income Tax applicable on maturity value if Death Benefit / Sum Assured is Less than 10 times of Annual Premium or single premium. Will the Tax be applicable on entire maturity value or difference of maturity value and total premium paid . It is understood that policy will be for minimum period of 3 years-5 years-10 years. Can it be treated as Long Term Gain with no tax liability..Pl advice

  5. K K SARAWAGI says:

    UTI’s ULIP has not given good returns in the past barring the starting one.

  6. Tuhin Mitra says:

    I don’t think it is a wise idea to club insurance with investment. Keep insurance as you expense and investment in such a way where u can get more n sure returns on your investment.

  7. KUNAL jain says:

    Thank u

  8. m. thyagarajan says:

    Dear Sir

    If a ULIP is prematurely exited (after the minimum holding period) at a higher NAV than the NAV at time of entry, how should the gain be treated?

    Is the gain taxable or non-taxable?

    If taxable”
    Is it capital gain, short or long term?
    Is it to be taken as part of normal income taxable at normal tax rates?

    best regards
    thyagarajan

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