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Unit Linked Insurance Plans

Last Update Date : April 29, 2019
Estimated Read Time: 5 min

If there is anyone dependent on you, parents, children, spouse, you need life insurance. A man who dies without life insurance needs to comeback to see the mess he has created. Hence life insurance is very important in this uncertain world. If apart from providing cover to you and your family, the insurance instrument invests on your behalf, will you like to invest in it? Confused right? H&R Block will help you in clearing it.

What is ULIP?

Unit Linked Insurance Plan is the instrument which provides insurance and investment at the same time. The investment can be made in the mutual funds, stocks or bonds. The amount paid as the premium is divided into two parts with the weight as specified by the policy-holder. The returns on the investment and the maturity amount is credited in the account of the policy-holder. If the policy-holder dies before maturity, his nominee will get the said amount. Working of a ULIP is almost similar to the mutual funds. The amount received from each policy-holder along with other policy-holders is invested in different sectors. The return received from these sectors is then received by the policy-holder as per his investment after maturity. The returns are calculated on the basis of the net asset value. The returns given by the ULIPs are approximately 8-10% compared to 12-14% returns given by the ELSS. ULIPs have a lock-in period of 5 years or in multiples of 5 years. At the start of ULIP, the insured has to pay the entire premium amount. After that, he has to make monthly payments as mentioned as annually, quarterly, monthly etc.

Considerations while Buying a ULIP

If you want to invest to achieve maximum returns, then you should opt for Equity link savings scheme or mutual funds or investing in stock markets. If you want to invest purely for the benefit of your family members, then you should invest only in insurance. If the offerings of ULIP are sufficient to solve both the purpose, only then opt for a ULIP.

[ Read: Best Tax Saving Mutual Funds ]

The amount of sum assured that your family receives should be enough for their living after your death. The investment plan in the ULIP must be chosen based on your spending ability and risk tolerance. The charges that need to be paid while investing in ULIP is very important. If the charges paid are more than the returns will prove to be a loss. You need to check whether you can shift from a ULIP to a normal insurance plan. If yes, what will be the process and charges for the same, should be asked.

Types of ULIPs

ULIP for Retirement

You pay your premium through your employer, and the matured amount will be credited to your account after retirement or the sum assured will be given to your family in case you have unfortunate death before maturity.

ULIP for Child

The assured sum or the matured amount along with the monthly returns is used for the education of the child of the policy-holder.

ULIP for Wealth Creation

It is beneficial for the individual in his early ages, where a major part of his savings can be invested in various funds and the remaining part can be used for his after-retirement plans.

ULIP for Health Benefit

ULIPs can be utilised for the medical expenses of an individual or his dependent family members.

Charges in ULIP

Administration Charges: Administration charges are cut from the units of investment to manage the policy and carry out its operations.

Fund Management Charges: These charges depend upon the type of investment that you choose. If you choose debt funds, then the fund management charges are less as you do not have to keep a continuous track of the market situation, unlike equity funds.

Switch Charges: You have an opportunity to change the type of investment fund as per your choice during the course of the period. However, you cannot do it indefinite times. There is a certain number of switches which are allowed, after which you will be charged with some amount per switch.

Surrender Charges: If you surrender your policy or discontinue the payment of your premiums before the maturity period, you will have to pay the charges. The charges depend upon the year in which you surrender or discontinue. The later is the year of surrender; the less is the charge applied. No charge is applicable after the end of 5 years. The amount of charge is the certain percentage of the fund value.

Mortality Charges: If the policy-holder passes away before maturity of the policy, a certain amount is cut from the sum assured on a monthly basis as a compensation to the insurer. This amount depends upon the premium the individual paid, his age, medical condition and financial background of his family.

Premium Allocation Charge: A certain percentage of the premium is deducted as a premium allocation charge for underwriting expenses. The remaining amount is utilised for fund distribution. It is high for the initial years, but it gets significantly reduced after some years.

Partial Withdrawal Charges: After completion of 3 years of the policy, there is a provision for the individual to withdraw a certain percentage from his funds after paying the partial withdrawal charges. The charges depend upon the investment fund chosen and the premium amount paid.

Types of Investment Funds in ULIPs

EquityMedium to High

Benefits of ULIPs

Bifurcation of Premium: Depending upon the plan that you choose, the premium amount will be divided into two parts, one will be the premium for your life insurance cover, and the other will be the investing amount.

Shifting from investment plans: If you want to change your investment options from a particular plan to other, there is an option available under ULIP.

Deduction under section 80C: The premium that a policy holder pays can be claimed as a deduction under section 80C. The limit to claim the deduction is Rs. 1,50,000.

Tax exemptions: The returns received, matured sum and the partial withdrawal are exempted from taxes.

Risk Factor: The ULIP is usually less risky, and a part of the amount paid is used as a premium for your insurance coverage. If the policy-holder selects an equity-based investment plan, the risk increases.

Increase in premium: You can increase the premium that you pay for a ULIP during any time in the course of the maturity period.

Transparency: The ULIP insurer, provides updates at regular intervals and also provides a facility to keep a record of the performance of the portfolio. This maintains the transparency between the insurer and insured.

ReadTax Benefits of Insurance ]

Disadvantages of ULIPs

High Complexity: As insurance and investment both are under the same instrument, the complexity increases. Management of both increases the cost compared to returns received.

High initial investment: As at the start of the policy, the entire premium needs to be paid, the initial cost is very high.

Market Volatility: As the portion of the premium is invested in equity funds, the market volatility affects the returns. ULIPs are not suitable for short-term investments.

ULIP provide the perfect platform for insurance and investment under one roof. But it will be beneficial to the individual if he keeps both of them different as the objective of insurance and investment is completely different.

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CA Madhuri Marne
Madhuri is a tax expert at H&R Block (India) with over a decade of professional experience. Having co-authored a book on economics for the ICAI exam, she now enjoys writing about tax-related topics in a simple and easy manner. Outside of work, Madhuri is passionate about teaching students who are appearing for professional exams.

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