Unit Linked Insurance Plans

Unit Linked Insurance Plans (ULIP) are a type of ‘Protection + Savings’ plans. They combine the benefits of protection and saving in a single instrument. The major advantage that a ULIP has over the traditional wealth creation tools is the benefit of a Life Cover. As a result, your money continues to grow and at the same time, your loved one’s future is protected from life's unexpected turns.

ULIPs are insurance plans that help you save for your goals while providing Life Cover. In most wealth plans, you pay your premiums for a certain time period. Once your policy term ends, you receive a lump sum amount called the Maturity Benefit. Moreover, in case of an unfortunate event during the term of the policy, your family receives an amount called the Sum Assured.

How ULIPs work?

A ULIP is both an insurance policy and an investment. The policy specifies a death benefit - the amount the nominee will be paid if the policyholder passes away during the term of the ULIP. In addition, if the policy holder survives the term of the ULIP, he/she can also get the maturity value of the ULIP. This will be the amount generated by the ULIP investments in equity and/or debt. The policyholder is typically allowed to choose ULIP funds and asset classes to generate these returns. This is the investment component of a ULIP.

Note that even if the value of the ULIP investments falls below the sum assured specified in the ULIP, the policy holder’s nominee(s) will be paid the death benefit specified.

Why should I start planning my savings now?

• The earlier you start planning with a ULIP, the earlier your goals can be achieved.
• It is advisable to be prepared for unforeseen circumstances, and ensure that your loved ones are taken care of, even in your absence.

Benefits of ULIPs

• Regular Savings: ULIPs inculcate the habit of regular and disciplined savings, which is the key to successful long-term financial planning. With regular premium payments, you can enjoy the benefits of wealth creation for your loved ones.
• Protection: ULIPs provide the protective benefit of a Life Cover, which keeps your family secure in your absence. ULIPs provide the protective benefit of a Life Cover, which keeps your family secure in your absence.
• Flexibility of Investment: You will have flexibility and control of your money through the following ways:
  1. Fund Switch – An option to move your money between equity, balanced and debt funds
  2. Premium Redirection – An option to invest your future premium in a different fund of your choice
  3. Partial Withdrawal - An option that allows you to withdraw a part of your money
  4. Top-up – An option to invest additional money to your existing savings
• Tax Benefits: Investment in ULIPs is eligible for deduction from taxable income under Section 80C of the Income Tax Act, 1961 up to 1.5 lakh per annum. The maturity proceeds of the ULIP are also exempt from tax under Section 10(10D) of the Income Tax Act subject to conditions specified therein. If the ULIP investor dies during the term of the ULIP he/she will be entitled to the death benefit specified in the ULIP policy and the amount received on death is exempt from tax u/s 10(10D) of The Income Tax Act 1961. Switching between ULIP funds also does not attract any tax
• Potential for Growth: There is a potential of earning higher returns from the power of equity and debt funds. This will help you achieve your life-goals such as buying a new home, your dream car, funding your child’s higher education and much more.
• Greater Rewards for Staying Invested: Your money grows further as the insurance company adds to your savings through bonuses/ additions and are available to you in ULIPs in different forms (such as, Loyalty Additions and Wealth Boosters).

How to manage ULIP funds?

• ULIPs are a long term investment and hence you should only invest in them with a long term time horizon. Note that the minimum lock-in period is 5 years, so you must be prepared to invest for at least that long
• Many ULIPs give the option of systematic transfers from debt to equity ULIP funds. If you pay an annual premium, this can initially be invested in a debt fund and systematically be transferred to an equity fund. This is very similar to the highly popular Systematic Transfer Plans (STP). Consider using it to reduce your investment risk
• Alternatively, several ULIPs offer a lifecycle-based strategy that automatically splits your money between equity and debt based on your age. Consider adopting this strategy if you are investing in the ULIP for your retirement
• You should periodically review the performance and prospects of your ULIP funds. You should switch out of ULIP funds which have underperformed or funds whose asset class is overvalued. You can do this by switching out of an equity ULIP fund and moving into a debt ULIP fund. This will not attract any tax charges. It may attract some costs but many ULIPs give a certain number of free switches to investors every year

How to find the best ULIP plans?

1. Performance of ULIP funds: ULIPs are an investment as well as insurance products. You should review the performance of ULIP funds over long term. Remember that ULIPs can have equity, balanced and debt funds suitable for investors/policy holders with different risk appetite and investment time horizon. ULIP equity funds offer high returns with high risk and debt funds offer lower returns with lower risk. The performance of ULIP funds should compared with their respective benchmarks over long time periods (eg: Nifty 50, BSE100, NSE 500, BSE 200 or Crisil Composite Bond Index).
2. Charges: Go for a ULIP with affordable charges. The typical charges associated with a ULIP include a premium allocation charge, policy administration charge, fund management fee, mortality charge, discontinued premium charge and switching charge.
3. Investment strategies offered: Many ULIPs offer investment strategies such as Systematic Transfer Plans and lifecycle based investing. Look for ULIPs that offer the strategies most suited to your goals.
4. Solvency Ratio: This ratio tells you whether the insurance company will be able to honour its claims in the future. Once again, look for a high ratio for solvency. The IRDA requires insurers to have a solvency ratio of at least 1.5
5. Claim Settlement Ratio: This figure tells you what percentage of claims have been paid out by the insurance company.

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