Unit-linked investment plans (ULIP) have been gaining popularity among young investors. While also considering mutual fund investments and other saving options, it is worth understanding what makes ULIP stand out, right?
Well, ULIPs are primarily an insurance instrument that offer investment benefits. So, while you build your wealth over time, you and your loved ones will have life insurance protection as well. In this section, we have discussed all about ULIP in detail. So, use this article as your go-to ULIP guide.
ULIP full form is Unit Linked Insurance Plan, and it is a relatively new product in the market. Also, being a versatile financial instrument, it offers a unique combination of life insurance cover and market-linked investments. By investing in a ULIP, you can enjoy the financial protection of a life insurance policy and grow your savings at the same time.
A portion of the premium paid towards life cover, while the remaining part is invested in funds of your choice. The fund allocation is made according to the risk appetite of the policyholder and the returns determined by market performance.
Understanding the workings of a Bajaj Allianz ULIP plan is simple. The premium paid towards ULIP plans is divided into two parts. One part is dedicated to providing a life cover, while the other is invested in the stock market.
The insurer pools in money from various policyholders and invests the same in a wide range of funds chosen by them. The investments are managed by fund managers, which takes away the need to track investments.
Once the money is invested, the corpus is divided into smaller 'units' with a certain face value. The units are allocated to each investor in proportion to the invested amount. The value of each unit at a given point in time is referred to as Net Asset Value (NAV). As the value of the underlying assets increases or decreases, the NAV reflects the same.
Here is a list of must-know terms in ULIP investments.
Fund Value – It is the total monetary value of the fund units owned by the policyholder.
Sum Assured – It is the amount guaranteed to the policyholder after the policy term is over.
Partial Withdrawal – The policyholder can withdraw a certain amount before the policy matures. Partial withdrawals can be done after the completion of the five-year ULIP lock-in period.
Fund Switch – It is a feature in ULIPs that allows policyholders to switch between investment funds. With this, you can switch from equity to debt and vice versa as per the market performance of your investment. Check with your insurer whether fund switching is chargeable or not before availing the feature.
Top-up Premium – It is an additional amount that you can pay over and above your existing premium amount.
Premium Payment Term – You can choose to pay ULIP premiums either as single-premium payment or as regular premium payment. In single-premium payment, you pay a lump sum amount together. Whereas, in regular premium payment, you get to pay premiums at regular intervals.
Policy Surrender – This means you want to exit the plan before the policy matures.
Surrender Value – It is the amount you pay in the event of policy surrender.
Maturity Benefit – It is the amount you receive in the event of policy term completion.
Death Benefit – It is the amount your beneficiaries receive from the insurer in case of your sudden and unfortunate dismissal.
ULIP Charges – These are the charges levied by the insurer. We have discussed ULIP charges in detail in the section below.
ULIPs are broadly classified as follows –
Risk and Investment Objectives
Purpose
Death Benefits
We have discussed each category in detail below.
The ULIP funds are categorised based on their risk and investment objectives. The four categories of ULIP funds include:
Equity Funds
Here, the primary investment made is in company stocks and equity. Equity-oriented funds are high-risk funds and are best-suited for investors with a high-risk appetite. According to the thumb rule, high-risk investments earn high returns. However, the primary aim here is capital appreciation.
Income and Bond Funds
Here, the funds are invested in fixed income instruments, government securities and corporate bonds. These ULIP investments offer moderate risk and return.
Balanced or Asset Allocation Funds
These funds are one of the most stable amongst all. These ULIP funds are basically a combination of equity-oriented funds and fixed interest instruments. The invested capital is distributed between the high-risk equities and low-risk funds.
Cash Funds
These are also known as money market funds or liquid funds. Here, your invested capital will be dedicated to low-risk money and short-term market instruments such as bank deposits, treasury bills, and commercial paper.
ULIP investments can be categorised based on the purpose they serve. It includes:
ULIPs for Wealth Creation
This plan is established to build wealth over time. ULIP for wealth creation is for young investors who can build a corpus to accomplish their future financial goals.
ULIPs for Retirement
You have to contribute towards this ULIP plan when you are working a job. It will gradually build a corpus for you when you retire. The amount that is collected is then paid to you in the form of annuities during your retirement age.
ULIPs for Child’s Future
Parents always want to ensure that their child’s future is financially secure. ULIPs for a child's future offer money to the children after they achieve significant milestones in life. In other words, the plan gives the money in instalments at specific intervals.
Here, all the financial requirements of your child’s future are taken care of, even in your absence.
Types of ULIP Plans can be broadly divided based on death benefits paid out:
Type-I ULIPs
Under the Type-I ULIP plan, the nominee gets the Sum Assured or Fund Value as the death benefit. In case the policyholder dies during the initial years of the policy when the fund value is relatively lower than the sum assured, the insurer will pay the sum assured to the nominee.
However, when the fund value is higher than the sum assured, the fund value is offered as the death benefit to the nominee. In simple terms, Type I ULIP plans offer either the Sum Assured or Fund Value, whichever is higher as the death benefit.
Type-II ULIPs
Under the Type-II ULIP plan, the nominee gets both the Sum Assured and Fund Value as a death benefit in the event of the demise of the policyholder. Hence, Type-II offers a more considerable death benefit as compared to a Type-II ULIP plan.
However, the premium for the Type-II ULIP plan is relatively higher as the insurance company assumes higher risk from the policyholder.
Let’s have a quick recap on what ULIP is and how the policy works.
The most convenient feature of ULIP is the policy’s premium payment method. Here’s a walkthrough on the same.
The premium paid on ULIP investments are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. An amount up to ₹1.5 lakh paid as annual premium is exempted from tax.
Further, the maturity benefit is also exempted from taxes under Section 10 (10D). Read more about ULIP tax benefits at Bajaj Markets to understand why this is a great investment avenue.
ULIP plans help you meet your financial goals. You can invest in equity funds, debt funds, or a combination of the two. However, ULIP plans also give you the flexibility to switch from equity to debt and vice versa.
So, in case you feel that your investment portfolio is not producing desired returns, you can make changes to it and hope to yield high returns.
Moreover, you can invest additional capital over and above your existing premiums. This can be done as and when needed, depending on your financial conditions.
Important indicators like charge structure, the value of the investment, and the expected rate of returns, will be shared by the insurance company before you buy a ULIP plan.
With ULIP plans, you get an option of partial withdrawal in the policy. With this option, you can manage emergency expenses, family vacations, a child's education, and more. Generally, the partial withdrawal option is free and can be availed after the lock-in period is over.
You also enjoy high profits from market-linked ULIP returns. This is possible because a portion of your premium is invested in funds of your choice. These funds could be either equity-oriented, debt funds, or a combination of the two.
The Insurance Regulatory and Development Authority of India (IRDAI) has made several changes in ULIP terms and conditions since 2010. One of the significant changes made to the policy was to increase the lock-in period from three years to five years. Since ULIP is primarily an insurance product, staying invested in it for a longer duration is beneficial for the investors. Therefore, a minimum of a five-year lock-in period will help you reap reasonable ULIP returns.
Here are a few ULIP fees and charges that you need to be aware of before investing in the policy.
Fund Management Charges – These are the expenses incurred when managing your funds. Generally, they are charged as a percentage of the fund’s value and are deducted before the Net Asset Value of the fund is derived.
Discontinuation Charges – This fee is applicable if the policyholder decides to discontinue the ULIP scheme before the lock-in period of 5 years is over.
Mortality Charges - This charge is levied monthly as compensation for the insurance company in case a policyholder does not live up to the assumed age.
Surrender Charges – This fee is applied in case of premature full or partial withdrawal of units. These charges are a percentage of the fund value and depend on the year in which the ULIP policy is surrendered.
Premium Allocation Charges – This fixed amount is deducted from the premiums paid. Generally, premium allocation charges are higher in the initial years of the policy. However, the amount may vary depending on whether the policy is a single premium plan or a regular plan, the amount of the premiums paid, premium frequency, and payment mode.
Policy Administrative Charges – This amount is charged for the administration of your policy every month. Generally, they are deducted by canceling units proportionately from the fund you have chosen to invest in.
Fund Switching Charges – Depending on your financial goals, you can switch between the funds. Your insurer gives you a fixed number of switches for free. Otherwise, each switch is chargeable, and these charges are deducted by canceling units proportionately from the fund you have chosen to invest in.
Partial Withdrawal Charges - ULIPs allow a partial withdrawal facility after the completion of the five-year lock-in period. While some insurers offer unlimited partial withdrawals, some restrict this facility to up to 2-4 free withdrawals. It is best to check with your ULIP provider regarding the same.
You can read more about ULIP Charges and fees on Bajaj Markets. Besides, if you are now keen on buying a ULIP, consider the following factors that will encourage you to make an informed decision
Here are a few things that you can keep in mind before investing in ULIPs.
If your primary financial goal is to build wealth over time and have sufficient funds by the time of retirement, ULIP should be your go-to investment strategy. To choose the type of ULIP that will fulfil your needs, answer these few questions:
Answers to these questions will allow you to understand your financial requirements, based on which you will be able to select the right ULIP investment.
Once you know your financial goals and the type of ULIP investment that will help you accomplish the same, the next thing to do is intensive market research. Today, several insurers provide the same type of ULIPS, making it all the more imperative to select the right and trustworthy provider.
You can compare the ULIP from different providers based on the policy cost, premium payment options, features and benefits, fund performances, etc. Also, consider the ULIP return rate usually provided by the insurer.
It is imperative to note that since ULIPs are not diversified, the risk involved in the investment component of the policy is high.
ULIP gives you two withdrawal choices:
Withdrawal Before Completing the Lock-In Period
Every ULIP comes with a five-year lock-in period. So, ideally, you cannot make any withdrawals from your policy until the completion of this lock-in period. However, if you make a partial withdrawal or wish to take the entire amount invested in ULIP by surrendering the policy or not paying the premium, you still won't be able to access your cash until the lock-in period is not over.
Withdrawal After Completing the Lock-In Period
You can withdraw money from ULIP after completing the five-year lock-in period. However, some terms and conditions are applicable on these withdrawals. These include:
Limit on Withdrawal Amount: If you withdraw a significant amount from your ULIP, chances are that your life insurance cover will be terminated. Additionally, the withdrawal limits may differ from insurer to insurer. Some permit withdrawal of up to 10% of the premium paid, while for a few others, this can be up to 20%. The limit can also depend on the fund value post-withdrawal.
Withdrawal Rules for ULIP Top-Ups: Those who opt for ULIP premium top-ups and then plan to withdraw an amount know that the insurer will settle the same from the top-up amount. However, note that the withdrawal amount is not settled from the top-up if the policy is yet to complete its lock-in period.
Between ULIP, Mutual Funds, and PPF, investing in ULIP helps diversify your investment portfolio. The following table summarises why investing in ULIPs over/along with other investment options should be your go-to financial strategy..
|
Unit-Linked Insurance Plan (ULIP) |
Mutual Funds |
Public Provident Fund (PPF) |
Nature of Product |
Combination of life insurance and investment |
Pure investment |
Government-backed savings scheme |
Coverage |
Provides life cover that is a minimum ten times the premium amount |
Does not offer a life cover |
Does not offer a life cover |
Tax Benefits |
You can avail income tax deductions on the premiums paid under Section 80C of the Income Tax Act, 1961. Also, the maturity amount is tax-free under Section 10(10D). Note: ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than ₹2.5 lakh. Such policies will be taxed at 10% on maturity |
Only Equity-Linked Savings Scheme (ELSS) mutual funds allow you to avail tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961 |
In PPF, an amount of up to ₹1.5 lakh invested in a single financial year can be claimed for deductions under Section 80C of the old income tax structure |
Flexibility |
Flexibility of choice when switching between funds |
No such flexibility offered |
No such flexibility offered |
Returns |
ULIP returns depend on the type of funds you choose to invest in and the performance of the underlying markets |
Mutual fund returns depend on fund allocation in conjunction with the market performance |
PPF is known to provide fixed returns every year. The interest rate is decided by the Indian government at the start of each financial year. Currently, PPF has an interest rate of 7.1% (2021-22). |
ULIP investments provide several features and benefits that you can avail. However, the highlighting factor of the instrument is its tax benefits. Along with building your wealth over time and securing your family’s financial future, ULIPs allows you to save money on tax.
Here’s a quick overview of ULIP tax benefits:
Tax Benefit on ULIP Premiums |
The premiums paid towards your ULIP investments can be claimed for tax deductions under Section 80C of the Income Tax Act, 1961 (old income tax structure). The maximum amount you can claim as a deduction under this section is ₹1.5 lakh. |
Tax Benefit on ULIP Maturity |
If all ULIP premiums are paid on time, you do not pay any tax on maturity (for policies issued before February 1, 2021) under Section 10(10D) of the Income Tax Act. However, for ULIPs purchased after February 1, 2021, the scenario is different. If the aggregate annual premium exceeds ₹2.5 lakh, the maturity benefit will be taxed as a capital asset as stated in the Union Budget 2021. |
Tax Benefit on Partial Withdrawals |
Once the five-year ULIP lock-in period is complete, you can make partial withdrawals. These withdrawals are tax-free under Section 10(10D) of the Income Tax Act. Moreover, the premium payable to the sum assured should not exceed 10%, and the partial withdrawal amount should be less than or equal to 20% of the fund value. |
Tax Benefit on Payouts in the Event of Death |
In case of your unfortunate death, your family will receive the entire sum assured or the total fund value (whichever is higher). This payout is completely exempt from tax. |
Tax Benefit on ULIP Top-Ups |
Another great feature of ULIP is that the policy allows you to increase your investment with top-up premiums. As such, you can invest any surplus cash in ULIPs and save money on tax. That’s because these top-ups are eligible for tax deductions under Section 80C of the old income tax regime. |
Long-Term Capital Gains (LTCG) Tax Benefit |
LTCG tax came into the picture with the Union Budget 2018. It is applicable on capital gains exceeding ₹1 lakh from equity investments (including ELSS). Thus, if you invest in equity-oriented funds through ULIPs, you can avail this tax benefit. |
You must have an in-depth understanding of any financial instrument before investing. And the same goes for ULIPs. Now, if you are looking for ULIP plans, then browse through Bajaj Allianz ULIPs available on Bajaj Markets.
You can benefit from features such as partial withdrawal of funds, alter premium payment frequency, rider options, and more. Some plans also offer features like the return of mortality charges, return enhancers, loyalty additions, fund boosters, and more.
For long-term financial goals and wealth creation, ULIP is an ideal investment instrument available in the market. Also, since the money invested in ULIPs is compounded, the net returns are relatively more, thus making ULIP a good investment option.
No. ULIP Maturity Amount is exempted from tax under Section 10(10D) of the Income Tax Act, 1961. Thus, you will either receive the assured benefit or the value of the unit-linked investments, whichever is higher.
With a standard ULIP plan, you have a withdrawal limit of 10% of the total premium amount. Sometimes, this limit is 20% of the premium amount. However, withdrawals are possible only after you complete the five-year lock-in period.
Yes. If you choose a safer route to make the investments that give relatively good returns, it is secure to invest in ULIPs. However, high returns are acquired only on equity-oriented funds which are a risky investment for the young investors.
If you plan to terminate your ULIP investment before the completion of the lock-in period, then you will have to pay surrender charges. However, you receive the payout only after the lock-in period is over.