What is a Unit Linked Insurance Plan?
Unit-linked Insurance Plan, better known as ULIP is a mix of insurance along with investment. It is a type of plan that provides benefits of protection against risks with life insurance and also allows the flexibility to manage your investments.
It fulfills goals of providing wealth creation along with life cover. A ULIP is typically started by an investor seeking to provide coverage for beneficiaries. The insurance company deducts a portion of your investment towards life insurance and deposits it in a fund based on equity or debt as per your choice and matches it to your long-term goals like retirement planning, children’s education or any other important event.
Parallel to mutual funds, the assets in a ULIP plan are managed to a specific objective. The plan calculates a net asset value and is then market-linked and appreciates with increasing value. When an investor purchases units in a ULIP, he or she is purchasing units along with a larger number of investors. Investors can buy shares in a single strategy or diversify their investments across multiple market-linked Unit-linked Insurance Plans.
How does a Unit Linked Insurance Plan work?
Unit Linked Insurance Plans, or ULIPs are insurance plans which combine the benefit of mutual funds with the benefit of life insurance in one plan or product. These plans provide market-linked returns along with life insurance coverage. The premiums that you pay for your plan get adjusted for the relevant charges which are mentioned beforehand. The net premium is then invested in a fund which is chosen by you – equity, debt, balanced etc. The Fund Value reflects your growing corpus by way of net asset values, or NAVs.
On maturity, the Fund Value is paid. In the case of death, the higher of the Sum Assured promised or Base premium fund value plus Top up sum assured or Top up premium fund value, if any is paid based on the chosen option.
During the initial years of a plan, a large amount of the premium is used for the plan expenses due to which the value of the fund would stay low initially. Later on, the premium is divided into two different segments – investment and insurance. Units are issued for the amount invested in a fund of your choice; it can be debt, equity or a combination of both. The allocation of the units relies on the performance of the original fund.
Components of Unit Linked Insurance Plans –
The first feature is the choice of funds available. Every insurer offers a variety of three basic types of funds which are:
- Equity Funds: These funds invest primarily in the equity market and hence follow an aggressive investment strategy. The risk presented by these funds is high and so is the return generating potential.
- Debt Funds: On the other end of the spectrum are debt funds which follow a conservative investment strategy. These funds invest in the debt and bond market and hence have a low-risk strategy. The returns from these funds, as obvious, are also conservative and low.
- Balanced Funds: Investors who wish to earn returns higher than those generated by the debt funds but are averse to the high-risk strategy of equity funds find respite in balanced funds. These funds are a combination of equity and debt funds and follow a moderate investment strategy. The risk is moderate and the returns are decent which are higher than debt funds but lower than equity funds.
The Life Cover:
Since ULIPs are insurance plans, insurance cover is available and is expressed as a percentage or multiple of the premium paid. In the case of death, higher of the Sum Assured or the Fund Value is paid. Thus, the life cover promised under ULIPs is guaranteed to be payable on death.
The premiums you pay would be subject to certain charges before they are invested in the chosen fund. These charges include the premium allocation charges, administration charges, fund management charges, mortality charges, etc. and are deducted every year or every month depending on the type of charge and policy terms.
Switching means transferring investments from one chosen fund to another. If your investment strategy changes over the plan tenure, the plan allows you to change your investment funds through switching facility which is free of cost up to a specified extent in one policy year.
The unique part about ULIPs which is absent in other insurance plans is the facility of partial withdrawal. In ULIPs, the policyholder can withdraw the Fund Value partially for any financial requirements without hampering the plan continuity. This withdrawal can be made any time after the first five years of the plan and a limited number of withdrawals are also free of cost.
ULIPs also allow for making additional investments into the plan through the facility of top-up premiums. Thus, the policyholder can use any surplus fund for investment in the plan apart from the premiums which are paid and reap the benefits of good returns.
Premiums vary with the terms of each Unit-linked Insurance Plan. An initial lump sum is typically required along with annual, semi-annual or monthly premium payments. ULIPs work best when invested for a longer period of time with multiple investment options. The funds can be chosen by the customers depending on their risk appetite or in other terms the ability to handle the loss. The right balance of investment in equity and debt funds over a longer period of time can protect the customer from the ups and downs of the market. The Insurance Regulatory and Development Authority of India (IRDAI) changed the lock-in period for ULIP’s from 3 years to 5 years in the year 2010. However ULIPs being a long-term product, as an investor you may not really reap the benefit of the policy unless you hold it for a longer term which may range from 10 to 15 years. ULIP’s allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of the market’s performance. Unit-linked insurance plan investors can make changes to their fund preferences throughout the duration of their investment. The funds offer to transfer flexibility. Numerous investment options are also available including stock funds, bond funds and diversified funds.Why are Unit Linked Insurance Plans good?
- Dual Benefit: With ULIPs you get a life cover coupled with investment. It offers security that an investor’s family can depend on this plan in case of events like the untimely death of the investor, etc. It is a type of plan that protects and offers you great returns as well.
- Choice of Systematic Investment: Apart from the insurance coverage, it is a good tool for systematic investment planning as it allows you to choose your investment and get good benefits in return depending on current market scenarios.
- Long Term finance Goals: If you have long-term goals like buying a house, a new car, etc., then ULIPs are a good investment option because the money grows as per market, provided the policy monies are left to grow for over a period of time.
- The switch flexibility: ULIPS are usually designed in a way that they allow you to switch your portfolio between debt and equity based on your risk bearing ability as well as your knowledge of how the market may be performing. ULIPs do not force you into investing as they provide freedom to choose your investment options as per your own risk profile.
- Market Linked Return: ULIPs allow an individual to earn market-linked returns as part of the premium is invested in market-linked funds that are invested in different forms of investment tools.
- Tax benefits: The premium paid towards a Unit-linked Insurance Plan is eligible for a tax deduction under Section 80C in India. Even short-term gains made by the policyholder by switching from one plan to another are tax-free. In addition to this, the returns out of the policy on maturity are also exempt from income tax under Section 10(10D) of the Income-tax Act. This is a dual benefit that you can claim with this type of plan.
Difference between Unit Linked Insurance Plans and Mutual Funds
Unit-linked Insurance Plans are often confused with another financial product- mutual funds. While ULIPs are investments with the dual purpose of providing an insurance cover as well as earning a return by investing, Mutual funds are investment vehicles that first accumulate money from investors and then investing in different assets to earn a return. The biggest difference between the two is that mutual funds do not offer a life cover as unit-linked insurance plans do.
Watch for these differences before you invest in ULIPs or Mutual Funds
|SCOPE||Only investment purpose||Investment and Insurance cover|
|TAX BENEFITS||Only equity-linked saving schemes will give you tax deductions||According to the section 80C of the income tax act, money invested is deductible from your taxable income.
Tax benefits u/s 10(10D) are also available.
*Subject to prevailing tax laws
|LIQUIDITY||Funds can be withdrawn within a year but 1% of the fund value is deducted.||Limited liquidity due to an initial lock-in period of 5 plus years.|
|FUND MANAGEMENT CHARGES||Fund management charges are high.||Fund management charges are low.|
Making the Most of Your Unit Linked Insurance Plan
- Foresee the long term: The most important thing about ULIP is that they are long term investments. You stand to gain the most if you stay invested till maturity. They are not short term investment vehicles to earn quick gains.
- Be clear: The prime objective should be to have adequate life insurance cover to protect yourself from unforeseen events. Work out the required life cover on the basis of your age, income, and dependents.
- Top-ups: For an additional amount over your regular premium, you could increase your investment component on the base policy.
- Partial Withdrawals: Partial Withdrawals are permitted generally after five years.
- Switches: You could switch your investments from one fund to another in case of changes in the risk profile.
- Premium Redirection: Future premiums can be redirected to invest in any of the available funds different from the funds chosen at the time of inception of the policy
Shriram Life Insurance Company’s Unit Linked Insurance Plans:
This plan offers multiple choices in terms of flexibility of investments and premium adjustments. With the lowest investable premium starting at only ₹ 3500/-* month. It also has attractive loyalty additions upon maturity. Whether it be safeguarding your wealth or creating more you cannot make the wrong choice with this.
India has come a long way from manually exchanging bonds under a tree, today we have several options of financial products that will help an individual invest his earnings depending on his needs, limitations, risk appetite and financial goals. Shriram life Growth Plus does exactly that.