Unit-linked insurance plan

A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.

History

The first ULIP was launched by Unit Trust of India (UTI).^[1] With the Government of India opening up the insurance sector to foreign investors in 2001^[2] and the subsequent issue of major guidelines for ULIPs by the Insurance Regulatory and Development Authority (IRDA), now Insurance Regulatory and Development Authority of India (IRDAI), in 2005,^[3] several insurance companies forayed into the ULIP business leading to an over abundance of ULIP schemes being launched to serve the investment needs of those looking to invest in an investment cum insurance product.

Working Principle

A Unit Link Insurance Plan is basically a combination of insurance as well as investment. A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) in varying proportions just the way it is done for mutual funds. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and appetite. Just the way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.

Features

A portion of premium goes towards mortality charges i.e. providing life cover. The remaining portion gets invested funds of policyholder's choice. Invested funds continue to earn market linked returns.

ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.

Types

Depending upon the death benefit, there are broadly two types of ULIPs. Under Type-I ULIP, the nominee gets the higher of Sum Assured and Fund Value while under Type-II ULIPs, the nominee of the policy holder gets the Sum of Sum Assured and Fund Value in the event of demise of the policy holder.

There are a variety of ULIP plans to choose from based on the investment objectives of the investor, his risk appetite as well as the investment horizon. Some ULIPs play it safe by allocating a larger portion of the invested capital in debt instruments while others purely invest in equity. Again,all this is totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.

Charges

Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that are deducted from the payable premium.^[4] The notable ones include policy administration charges, premium allocation charges, fund switching charges, mortality charges, and a policy surrender or withdrawal charge.^[5] Some Insurer also charge "Guarantee Charge" as a percentage of Fund Value for built in minimum guarantee under the policy.

Risks

Since ULIP (United Linked Plan) returns are directly linked to market performance and the investment risk in investment portfolio is borne entirely by the policy holder, one needs to thoroughly understand the risks involved and one’s own risk absorption capacity before deciding to invest in ULIPs.

Providers

There are several public and private sector insurance providers that either operate solo or have partnered with foreign insurance companies to sell unit linked insurance plans in India. The public insurance providers include LIC of India, SBI Life and Canara while and some of the private insurance providers include Reliance Life, ICICI Prudential, HDFC Life, Bajaj Allianz, Aviva Life Insurance and Kotak Mahindra Life.

Tax Benefits

Investment in ULIPs is eligible for tax benefit up to a maximum of Rs 1.5 lacs under Section 80C of the Income Tax Act.

Maturity proceeds are also exempt from income tax. There is a caveat. The Sum Assured or the minimum death benefit must be at least 10 times the annual premium. If this condition is not met, the benefit under Section 80C shall be capped at 10% of Sum Assured while the maturity proceeds will not be exempt from income tax.^[6]

References