All About ULIP - Unit Linked Insurance Plans

When it comes to creating a financially secure future for yourself and your family, it is important to choose investments that can both protect you and generate wealth.One such investment tool that offers both benefits under the same plan is ULIP (Unit Linked Insurance Plan). Along with safeguarding against unfortunate events, it offers investment opportunities, tax benefits, and loan facilities. Read on to know more about this versatile product.

A Unit Linked Insurance Plan is a dual-benefit policy that offers the advantage of investing into equity, debt or both, whileproviding protection through a life insurance cover. Put simply, this is a long-term investment plan for wealth creation, combined with the protection of a life cover. This flexibility of investing while insuring yourself makes ULIP a good choice for achieving long-term financial goals.There are different types of ULIP plans on offer, each with a different objective, premium, and coverage. You can also choose a plan based on a payment option convenient for you, such as lump sum payment (Single Premium) or a regular premium payment, and depending on whether it is equity-based or debt-based.Moreover, your investment strategy can be customised, based on your age. So, if you start investing early, you can allocate a larger share of your premium payment towards fund investments and gradually taper it down as you age, and your risk appetite reduces. As this happens, your allocation towards the insurance cover can increase, ensuring better protection for your family.

Since ULIPs serve a dual purpose, your premium payment towards this investment is split into two parts. One part is invested in the units of a mutual fund, which could be debt, equity, or a mix of the two. The fund you choose entirely depends on your goals, risk appetite, and financial capacity. The other part of the premium goes towards your life insurance cover.The investment component is further broken down into ‘units’ consisting of the Assets Under Management (AUM) of a mutual fund. Each unit has a value that keeps moving every day according to the price fluctuations of each underlying asset. Therefore, the value of each unit is calculated at the end of each day. This is called the Net Asset Value or NAV. As your investments are handled by professional fund managers, you do not have to worry about a thing. Also Read : ULIP vs SIP, which is a better investment option?

A unique feature of a Unit Linked Insurance Plan is the payment method. Here’s a quick rundown of the same:

1. Single premium: As the name suggests, you can choose to pay the entire premium for the policy period in one go, as a lump sum amount. This payment is made right before the policy term starts.
2. Regular premium: In this case, the insurer allows you to pay the insurance premium periodically to reduce the financial burden. This payment can be made quarterly, monthly, or annually based on the policy term.
3. Premium payment years: Generally, the number of years for which you pay the premium is equal to the policy term. However, Indian insurers offer the freedom to pick the number of payment years when you purchase a ULIP.

Investing in a Unit Linked Insurance Plan offers numerous benefits. Dual benefit of insurance with investment :As mentioned, ULIPs offer the opportunity to grow your wealth by putting your money in investments that suit your needs. At the same time, they provide protection for your family should anything untoward happen to you during the policy term. It ensures the financial safety of your family’s future while earning decent returns over the long term. Investment flexibility :ULIPs are quite flexible in terms of the investment options available. You can invest in equity, debt or balanced funds, depending on your risk appetite and financial goals. You can even switch between funds based on market conditions or changing financial goals. Tax benefits: Section 80C and Section 10(10D) of the Income Tax Act, 1961 deal with the various tax benefits extended to ULIPs. For instance, premiums paid towards ULIPs are eligible for tax deduction under Section 80C, while the maturity proceeds and death benefits received from ULIPs are tax-exempt under Section 10(10D). Long-term investment :More often than not, long-term financial goals, such as marriages, children’s education, downpayment for a house, etc., require significant amounts of money. ULIPs usually come with a lock-in period, ranging from 5 to 10 years. This ensures your investment not only stays safe but grows throughout that duration to meet such financial goals. An added benefit is that it inculcates investment discipline. Transparency :ULIPs are quite transparent in terms of charges and fees. You can track the performance of your investments and the charges levied by the insurer. These include premium allocation charges, fund management charges, mortality charges, and surrender charges. This transparency allows you to make informed investment decisions. Also Read: What are The ULIP Charges That Everyone Needs to Know (DETAILED) ULIPs also come with certain drawbacks that you should consider before investing in them. For example, this type of investment includes various charges, such as, mortality charges, switching charges, and more, which results in relatively high premiums.Additionally, ULIPs are prone to market volatility risks, particularly those linked to equities.

The ‘Unit Linked’ portion of a ULIP refers to the part of your insurance premium that remains after the charges and fees are deducted. This portion is then invested, which is what you earn returns on. Much like mutual funds, ULIPs are professionally managed by fund managers, are subject to daily changes in the NAV, and allow investment across various types of funds. There are two things to keep in mind about ULIPs:

1. Only a fraction of the total premium paid is invested in funds.
2. Once invested, you cannot move to a different insurer due to the 5-year lock-in period.

Also Read: Optimise Your ULIP Investment Plan Returns: 3 Tips

As a critical part of financial planning, it is vital to understand how investing in ULIPs can offer tax benefits.

• According to Section 80C of the Income Tax Act, 1961, all your premium payments are exempt from tax. However, you should note that under this section, the maximum tax exemption is limited to a total premium payment of ₹1.5 lakhs per annum.
• The government has also exempted Long Term Capital Gains (LTCG) from taxation for ULIPs issued on or after 1 February 2021. But this is only applicable for cases in which the total premium payable of all policies is less than ₹2.5 lakhs. Therefore, all capital gains earned from ULIPs are tax-free. Here, ULIPs score a point over mutual funds as tax kicks in for the latter if your capital gains exceed ₹1 lakh per annum.

Also Read: How Modern ULIP Plans Lead to Better Tax Planning and Saving

As mentioned above, here are some charges associated with ULIPs you must know about:

1. Fund management charge : This fee is levied for managing your funds and is typically calculated as a percentage of the fund's value. It is deducted before the NAV of the fund is calculated.
2. Mortality charge : This fee is deducted from the premium you pay for your ULIP. Since it is a cost involved in providing you a life cover, it factors in your age, health status, and sum assured. The mortality charge is deducted from your premium amount and the balance amount is invested.
3. Discontinuation charge : This fee is charged if you decide to stop or discontinue premium payments before completing the lock-in period of 5 years.
4. Premium allocation charge : This is a fixed amount deducted from the premium and is usually higher during the first few years of the policy. The amount varies depending on the type of policy, premiums paid, and payment mode.
5. Surrender charge: If you make an early withdrawal of units (full or partial), you may be charged a fee, which is also typically a percentage of the fund's value.
6. Partial withdrawal charges : ULIPs allow partial withdrawals after the lock-in period of five years. Some insurers may also offer unlimited partial withdrawals, while others may put a cap on the number of free withdrawals. It is important to check with your insurer regarding the details of partial withdrawals.
7. Policy administration charge: This charge is applied every month for the administration of your policy, and is deducted by proportionately removing units from the fund you have invested in.
8. Fund switching charges : If you wish to switch between funds, your insurer may offer a certain number of free switches. Once you exceed this number, you may be charged a fee, which is deducted in a similar fashion as the Policy Administration Charge.

What to keep in mind before buying a ULIP

Detailed checklist