Is the modern-day ULIP worth it? Have the ULIP charges reduced? Let us discuss and compare the core components of ULIP.
United Linked Insurance Policy or ULIPs is a type of policy that has a double benefit. It offers wealth on one hand and gives life security on other hand. The premium paid in ULIPs is divided into two parts. One part of your premium comprises the Life Insurance and the remaining money is invested in funds.
ULIPs is offered by various companies and the ULIP charges differ accordingly. According to IRDA ULIP charges have reduced drastically and the insurance companies cannot charge fund management more than 1.35% per annum.
What is a ULIP and How does it Work?
ULIP or Unit Linked Insurance Plan is a financial product that includes two parts;
- Investment part
- The Insurance part
When an investment is made in the ULIPs, the insurer invests a part of the premium in shares and the remaining amount is utilized in giving a life insurance cover. The fund managers track and manage the investment part so the investor is saved from tracking the investment. Though ULIP is an investment as well as an insurance product, one should treat it as an investment product.
The insurer uses up some part of the premium which means the remaining amount of money you have paid as premium actually goes into your investment. The insurance part gives the ULIP wonderful tax benefits which are generally not available in the case of the mutual fund industry.
So to brief it up ULIP is a combination of investment, insurance and tax saving that combines to form triple benefits. To understand the ULIPs advantages and disadvantages one has to understand the three major part in which the policy holder’s premium gets assigned and these are;
Types of ULIP Charges:
There are various charges in the ULIPs. If you are wondering what these charges are they are basically a life insurance company benefiting from the premium that you pay for increasing their profits and for paying commission to insurance distributors like agents and bank. The ULIP charges calculation is based on the following factors;
1) Mortality ULIP Charges:
Let us discuss the part of the premium that goes into life insurance. This is one of the most essential ULIP charges. Insurance premium has two important benefits so you need not treat it solely as an expense. The first benefit is, you do get some insurance cover, but more importantly, the insurance provides tax benefits.
The entire invested amount is tax benefitted including the money that goes into your investment funds. If you are wondering how much insurance coverage is provided in ULIP? Then it is usually ten times the premium paid. Sometimes it might go lower to 7 times the premium paid.
The reason behind 10 times is because the rules say that a sum assured of the 10 times of the premium or more will be needed to be eligible for tax benefits. The insurance part of the premium is 10 %. Insurance premiums depend on many factors like:
- The age of the policyholder
- Smoking habit
- The sum assured
- Medical History
The mortality charges keep reducing every year and at one point it turns to 0. While your age pushes up the mortality rate the fund value which is growing faster pushes down the mortality charge. This is an advantage in ULIP.
If you are below 40 years of age in most cases the mortality charges will become 0 by the end of the 9th year. You can calculate the ULIP charges by sending an online quote to the company and get more details.
2) Fund Management ULIP Charges:
The Fund Management charges are a type of ULIP charges which is very similar to the expense ratio in mutual funds. This is also an essential charge. This charge is used to manage your funds. According to IRDA ULIP charges the fund management charges should not be more than 1.5%.
3) Premium Allocation ULIP Charges:
This charge is the percentage of the premium that you pay during the first year. These are certain expenses that have to be paid initially at the time of issuing the policy. The expense fee includes the agent’s commission, underwriting expense, medical expense, etc. After deducting these charges the rest of the money is invested in funds.
4) Policy Administration ULIP Charges:
This is a fixed expense charge every month. Each month your insurer will deduct a certain amount for the administration of your policy. The charges are deducted directly from the units of each fund.
5) Fund Switching ULIP Charges:
An investor can switch between funds free of cost for a fixed number of times. Eventually, after that, the charges would be Rs. 100-500 per switch based on the insurer’s charge structure.
6) Partial Withdrawal Charge:
Investors can partially withdraw from ULIP based on certain conditions from the third year. This withdrawal attracts penalty charges.
7) Discontinuance ULIP Charges:
If the insurer surrenders ULIPs prematurely these charges are incurred. On account of discontinuance of the policy, an insurer shall recover only the incurred acquisition cost. The surrender charges for the first four years range from Rs. 1000- 3000. After the fifth year, there are no surrender charges.
8) Guarantee ULIP Charges:
The investor has to pay guarantee charges for high- NAV variety in ULIP. For example, if the ULIP guarantees you 130% after 10 years, then you have to pay guarantee charges for it.
9) Rider Charges in ULIP Plan:
These are additional benefits that the insured gets over the base plan. You have to pay charges if you need a critical illness rider.
Understanding the Investment Part in ULIP:
The core part of the ULIP plan is the investment part. The money that goes into your investment is the net of all the charges that we have discussed above. This money is invested in funds that are maintained by the life insurance companies investment team.
ULIPs and mutual funds have a lot in common. The performance in ULIPs and mutual funds are not guaranteed. Just like mutual funds the ULIPs also have a fund management team. The units are issued and NAVs are declared daily, a monthly fund statement is issued.
Just like mutual fund companies, life insurance companies offer several investment options like the large-cap fund, mid-cap funds, diversified equities, debt, money market, hybrid funds etc.
ULIP Fund Investment:
ULIP invests in the following funds;
- Equity Funds: One of the funds that the ULIP invests in are equity funds. A part of the premium paid is invested in equity funds which are subject to higher risk.
- Debt Funds: Another fund where the premium is invested is in debt funds. They have a lower risk factor but at the same time, the returns are also low.
- Balanced Funds: The premium paid is balanced between the equity and debt funds to lower the chances of risk for the investors.
Benefits of These Funds:
- You can use this money for the retirement days.
- You can invest in ULIPs for your child’s education in terms of long term plans.
- You can invest to fulfil your long term plans like building a house.
Death Benefit in ULIP:
- In ULIP Type 1 it pays the highest sum assured or the fund value to the nominee in case of unfortunate death of the policyholder.
- In ULIP Type 2 it pays the assured sum value and the fund value to the nominee in case of unfortunate death of the policyholder.
Performance of Modern Day ULIP:
The old ULIP plan was unpopular due to high charges. The New regulations came into effect in September 2010. The IRDA has changed certain norms and charges of the ULIP. These regulations have made the ULIP plan more investor-friendly. The following changes have been made and applied;
- The charges are distributed for five years instead of 2 years.
- ULIPs offers a minimum life cover of 10 times the premium of the first year.
- The charges have been capped so the NAV is high.
ULIP Charges v’s Mutual Fund Charges:
Let us take a look at the ULIP charges comparison with Mutual Funds.
|Particulars||ULIP (United Linked Insurance Plan)||Mutual Funds|
|Life Insurance||Provides life insurance coverand investment in funds||Purely for investment|
|Lock-in Period||3-5 years||No lock-in period|
|Liquidity||Not liquid because of the lock-in period. Discontinuance of ULIP will incur certain surrender charges that will affect the returns you might be expecting.||Highly liquid and can redeem money immediately|
|Taxation||ULIPs has two tax advantages Tax benefit on PremiumTax benefits on maturity proceeds. Tax deduction benefits up to 1.5 lakh per annum.||They are not tax-deductible.|
|Expenses||The expense charge is high||The charge fee is comparatively low|
|Transparency||It is less transparent regarding hidden charges and asset location. As the policy is complex due to the insurance and investment part involved.||They have a simple process and make sure that all the information is available for the investors.|
|Loyalty Benefits||They give loyalty benefits to their policyholders. If the policyholders stay for a longer period of 5-10 years loyalty benefits are given in the form of additional units.||No Loyalty benefits|
|Switching and Rebalancing of funds||ULIPs allow the policyholders to move units fully or partially from one fund to another without any charges of exit load.||They charge an exit load for switching from one fund to another.|
Advantages of ULIP:
- It is a bundle of insurance and investment product.
- ULIP is considered more as an investment rather than an insurance scheme.
- It offers tax-free returns and is eligible for a tax deduction.
- Due to the lock-in period for 3-5 years, it will make people stay invested for a longer time in comparison to mutual funds.
- ULIPs allow you to switch between debt and equity funds. The flexibility of switching makes this plan very popular among investors.
United Linked Insurance Plans Available in the Market:
1) Bajaj Allianz Life Goal Assure- ULIP:
- Ensures tax-saving benefits.
- Loyalty benefits and fund booster are added if the policy term remains for 5-10 years.
- At the time of maturity, your entire mortality charges or life cover charges will be returned.
- The maturity amount is given in instalments.
- You can choose from four different investment strategies.
- There are eight funds available to suit your requirements.
2) Aditya Birla Sun Life Insurance Wealth Assure Plus- ULIP:
- Return of premium allocation charges and mortality charges are key features of this plan.
- They have enabled a systematic Withdrawal Facility for regular withdrawals.
- Wealth booster and loyalty benefits act as an added advantage.
- You have a choice of 5 investment strategies and 16 funds to choose from.
- Premium is waived off on critical illness
3) ICICI Pru Signature- ULIP :
- It offers life cover till age 99
- Funds can be withdrawn partially or regularly without any charges.
- It acts as an extra wealth booster at 3.25%
- Tax-free maturity amount and tax benefit on premium paid.
- No premium allocation charges.
- Unlimited free switches.
- The investment flexibility allows you to opt for a change in funds.
4) HDFC Life Click 2 wealth- ULIP:
- Unlimited free switched between funds
- Mortality charges will be returned on maturity.
- 101% of the premium is allocated for the first 5 years to your fund.
- Claim settled in one day.
If you have a long term goal of building a house or buying a new car or getting married then ULIP is a good option. The net returns are more than the FD account or savings account. The longer you keep the policy the more benefits you reap from it. Since ULIP is a bundle of insurance and investment this makes it a good plan.