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What is Unit Linked Insurance Plan (ULIP)?
The term “ULIP” stands for Unit Linked Insurance Plan, it is a type of life insurance policy but actually it is a combination of a life insurance policy and an investment scheme because the amount of premium paid by the policyholder towards the Unit Linked Insurance Plan (ULIP) is divided into two parts one part out of which goes towards the life insurance and another part goes towards the investment scheme, policyholder has the right to select the investment instrument, investment can be done either in equity, debt or in both (hybrid).
Unit Linked Insurance Plan includes some risk as the investment value can go up or down depending upon the market conditions, investing in Equity is a riskier option but yields higher returns as compared to investing in debt, one should select the investment instrument after analyzing one’s risk-taking capacity and expected returns.
The Unit Linked Insurance Plan usually has a 10x sum assured of the annual premium paid by the policyholder, but it can be modified according to the needs of the policyholder.
Death Benefits: In case the policyholder dies during the term period of the policy then the nominee of that policyholder will get the amount of sum assured or current investment value, whichever would be higher at that time. But, in some plans, you can get both the amount of sum assured plus your current investment value, in such plans the amount of premium is comparably higher.
Maturity Benefits: In case the policyholder outlives the term period of the policy then the amount of current investment value at the time of maturity will be paid to the policyholder.
Note: As per the rule of the Insurance Regulatory and Development Authority of India (IRDAI) ULIP comes with a 5 year lock-in period which means you cannot withdraw the investment amount before 5 years of starting your policy.
However, you can discontinue/surrender your policy before 5 years upon which your investment value will be transferred to DP funds and you will get 4% P.a interest on that amount, and the total amount will be paid to you after the completion of the policy’s lock-in period.
Types of ULIP policies
- Single premium ULIP: In single premium ULIPs you have to pay the entire amount of premium upon starting your policy, after that you don’t need to pay anything and you will get all the benefits as mentioned in the policy.
- Regular premium ULIP: In regular premium ULIPs you can pay the amount of premium in installments, you can pay it either monthly, quarterly, semi-annually, or annually.
- Equity ULIPs: In equity ULIPs the entire money is invested in equity shares, risk and returns both are higher in equity ULIPs.
- Debt ULIPs: In debt ULIPs, the entire money is invested in debt instruments such as bonds, debentures, government securities, etc. Risk and returns both are comparably lower than the equity ULIPs.
- Balanced ULIPs: It is a combination of equity and debt ULIPs where a part of the investment is made in equity and another part in debt instruments. So, it carries lower risk as compared to pure equity ULIPs and has the potential to generate good returns over a period of time.
- Guaranteed ULIP: In guaranteed ULIPs a small portion of the premium goes into equity and a larger portion is invested in debt instruments, it keeps an investor away from the market volatility and generates stable returns.
- Non-guaranteed ULIP: It is just the opposite of guaranteed return ULIPs , a small portion of premium is invested in debt instruments and a larger portion is invested into equity, here the returns are not stable and depend upon the market situation.
- Life-staged ULIP: In life-staged ULIPs investment is done considering the age of a policyholder, it is assumed that as a person grows older his/her risk-taking capacity decreases, so a larger portion of premium is invested in equity and a smaller portion is invested in debt initially and investment continuously decreased in the equity and increased in debt instruments as a policyholder’s age increases.
Who should consider buying a ULIP policy?
A Unit Linked Insurance Plan (ULIP) can be a good option for individuals who align with the following characteristics:
- Long-term investment horizon: Individuals who are willing to stay invested for an extended period may benefit from the potential wealth creation offered by ULIPs.
- Risk-tolerant investors: ULIPs typically invest in market-linked funds, so people who are comfortable with market fluctuations can think of ULIPs.
- Seeking a blend of insurance and investment: Individuals looking for a combination of life insurance coverage and investment opportunities within a single plan may find ULIPs attractive.
- Goal-oriented planning: Investors with specific financial goals, such as saving for children’s education, buying a home, or planning for retirement, can use ULIPs to align their investments with these objectives.
- Tax planning: Individuals looking for tax benefits on their income may consider ULIPs, as they offer tax deductions on premium payments under Section 80C and potential tax-free proceeds at maturity under Section 10(10D).
- Young investors: The risk-taking capacity is typically higher when a person is young, so young individuals with a higher risk tolerance and a longer investment horizon may benefit from the potential growth and compounding effect of ULIPs.
How to buy a ULIP policy?
You can buy a Unit Linked Insurance Plan (ULIP) either through online mode or offline mode, to buy a ULIP policy through offline mode you need to visit the branch of the insurance-providing company or you can buy it through an authorized insurance agent.
Generally, people nowadays prefer to buy insurance policies online as it is more convenient and also saves both time and money as it doesn’t include agent commission, administrative charges, and other costs.
To buy a Unit Linked Insurance Plan online read the below steps:
- Research and Compare: Research different insurance providers and compare ULIP plans available in the market. Consider factors such as fund options, charges, lock-in period, flexibility, customer reviews, claim settlement ratio, coverage period, sum assured, amount of premium, etc.
- Visit Insurance Company’s Website: Go to the official website of the insurance company offering the ULIP plan you are interested in.
- Plan Selection: Now, select the ULIP policy which you find best based on your needs.
- Fill in Personal Details: Complete the online application form by providing accurate personal details, such as your name, contact information, date of birth, and address.
- Choose Sum Assured and Policy Term: Specify the sum assured (insurance coverage) and choose the policy term that aligns with your financial goals. The amount of premium depends upon the amount of sum assured you choose.
- Select Fund Options: Choose the fund options based on your risk appetite and investment preferences. ULIPs typically offer equity, debt, or balanced funds.
- Review Policy Terms: Read and understand the terms and conditions, inclusions, exclusions, and other policy-related information provided online.
- Upload Documents: Upload necessary documents online, which may include identity proof, address proof, and other relevant documents. Some insurers may require a medical declaration.
- Review and Edit: Review all the information provided in the online application, do edit if necessary.
- Premium Payment: Choose a convenient online payment method to pay the initial premium. Online payment options may include credit/debit cards, net banking, or other electronic payment methods.
- Policy Issuance: After successful payment, the insurance company will issue the policy document. It may be available for download on the website, or a physical copy may be sent to your registered address.
Note: If you have any questions related to the policy then you can contact the insurance company’s customer support.
Benefits of ULIP policy
- Life insurance and Investment scheme: A Unit Linked Insurance Plan serves as both a life insurance policy and an investment scheme at a time.
- Switching facility: A Unit Linked Insurance Plan works as an investment scheme also where a part of the premium is invested either in equity, debt or in both as per the policyholder’s choice. This fund switching option allows a policyholder to shift their investment from one instrument to another, generally there are a certain amount of free switches included in the policy and after free switches are consumed switching charges are applicable for any additional switching.
- Tax benefits: A Unit Linked Insurance Plan policyholders enjoy tax benefits under Section 80C, Section 80D, and Section 10 (10D) of the Income Tax Act 1961.
- Investment decision: A policyholder is allowed to decide where the funds will get invested, options are either in equity, debt or in both (hybrid).
- Partial withdrawal: A policyholder is allowed to make partial withdrawals out of the investment value after completion of the lock-in period i.e. 5 years after issuing of a policy.
Drawbacks of ULIP policy
- Lots of charges: There are lots of charges attached to a Unit Linked Insurance Plan which results in decreasing your return on investment, some of the charges are premium allocation charges, fund management charges, switching charges, administration charges, policy surrender charges, etc.
- Risk: Funds are invested in the market-linked instruments so the return on investment depends upon the market conditions, if the market is performing badly then it will directly hurt our return on investment.
- Lock-in period: The Unit Linked Insurance Plan has a fixed lock-in period of 5 years as per the rule of the Insurance Regulatory Development Authority of India (IRDAI), so policyholders are not allowed to withdraw funds before completion of the lock-in period. If a policyholder surrenders his policy during the lock-in period then the amount of his investment value will be transferred to DP funds on which 4% interest P.a. will be added and paid to the policyholder upon completion of the lock-in period.
Taxation for Unit Linked Insurance Plans
As of February 1, 2021, the taxation rules for Unit Linked Insurance Plans (ULIPs) changed. Before this date, the taxation structure differed. The amended tax laws implemented after February 1, 2021, brought about modifications in how ULIPs are taxed, below mentioned are the new tax laws for ULIPs
- Section 80C of the Income Tax Act, 1961: The amount of premium paid for a ULIP policy is exempted from income tax, the maximum deduction limit is Rs. 1,50,000 P.A.
- Section 10 (10D) of the Income Tax Act, 1961: A ULIP policyholder is not required to pay income tax on the sum assured received at the time of policy maturity, provided that the annual premium paid for single or multiple policies is less than Rs. 2,50,000. However, if the amount of premium paid in a year exceeds Rs. 2,50,000, then the gains on maturity will be treated as long-term capital gains and LTCG tax will be applied. Note: The proceeds from the policy in the event of the policyholder’s death remain exempted from income tax, irrespective of the premium amount exceeding the specified limit.
- Partial Withdrawal: If the annual premium paid towards one or multiple Unit Linked Insurance Policies (ULIPs) is less than Rs. 2,50,000, no income tax will be charged on the amount withdrawn in case of partial withdrawal. However, if the premium amount exceeds this limit, which is Rs. 2,50,000 per annum, the funds partially withdrawn from the policy will not be exempted from income tax. In such cases, long-term capital gain tax will be applicable at a rate of 10%. It’s important to note that the first one lakh of the income generated from long-term capital gains is exempted from this tax.
- Tax on policy surrender:
Case 1: If a ULIP policy, with an annual premium not exceeding Rs. 2,50,000 P.a. is surrendered after the completion of the lock-in period (5 years), no income tax will be payable on the surrender value.
Case 2: If the annual premium for the same ULIP policy exceeds Rs. 2,50,000 P.a. and the policy is surrendered, then long-term capital gains tax will be applicable on the surrender value.
Case 3: If a Unit Linked Insurance Plan (ULIP) policy is surrendered before the completion of the lock-in period, the surrender value will be considered as an individual’s income. Subsequently, it will be taxed according to the individual’s applicable tax bracket.
Term Insurance Vs ULIP
Parameters | Term Insurance | Unit Linked Insurance Plan (ULIP) |
Purpose | Pure life insurance | Life insurance plus investment scheme |
Premium | Premium amount is lower as compared to ULIPs | Premium amount is higher as compared to the Term insurance |
Sum assured | You can get a higher sum assured at the same amount of premium | You get a lower sum assured at the same amount of premium |
Maturity Benefits | Nothing is paid upon the policy maturity | The amount of sum assured is paid upon the policy maturity |
Compensation | Only in case the policyholder dies during the term period of the policy | Either policyholder dies during the term period of the policy or outlives the term period, compensation will be provided |
Withdrawal | No withdrawals | Withdrawals can be made only after the completion of the lock-in period (5 years) |
Charges | Comparatively Lower charges | Comparatively Higher charges |
Riders | You can add riders | You can add riders |
Tax benefits | Yes | Yes |
Conclusion
Unit Linked Insurance Plans are a unique financial instrument that combines the benefits of life insurance and an investment scheme at a time, a policyholder is free to select the investment instrument where he wants to park his funds. It allows individuals to tailor their investment portfolios based on risk tolerance and financial goals.
However, it’s crucial for investors to carefully assess their risk tolerance, understand the associated charges, and regularly review their investment strategy to ensure alignment with their evolving financial objectives.
FAQs section
Q1: Can I buy more than one ULIP policy in my name?
A1: Yes, you can buy more than one ULIP policy in your name.
Q2: Do I have to pay income tax on maturity benefits if I have purchased a ULIP before 1 Feb 2021, whose annual premium amount exceeds Rs. 2,50,000?
A2: Unit Linked Insurance Plans (ULIPs) purchased before February 1, 2021, the maturity amount received is generally not subject to income tax, regardless of whether the annual premium exceeds Rs. 2,50,000. However, there is a condition that the annual premium should not exceed 10% of the sum assured of the policy.
Q3: Can I withdraw the amount of investment value before 5 years of starting my ULIP policy?
A3: No, you cannot withdraw funds out of the investment value before 5 years of starting your policy as there is a 5 year lock-in period in case of ULIP policies. But, you can withdraw funds after completion of a 5 years lock-in period.
Q4: What is the role of Insurance Regulatory and Development Authority of India (IRDAI)?
A4: IRDAI is a regulatory body that oversees and governs the insurance industry in India. The primary role of IRDAI is to regulate, promote, and ensure the orderly growth of the insurance sector in the country.
Q5: How to compare different Unit Linked Insurance Plans?
A5: You can compare different ULIPs based on the premium amount, sum assured, claim settlement ratio, number of free switches, payment period, riders available, etc.
Q6: Can I add riders to my ULIP policy?
A6: Yes, you can add riders to your ULIP policy by paying some extra amount of money, but you can only add the riders that are available with the policy.