Unit linked insurance products

Key Takeaways:

  • Unit linked insurance products are hybrid financial products with the features of both investment and insurance
  • A part of the premium goes to shares/bonds etc and the other part is used for insurance cover
  • ULIPs can be divided on the basis of following types: End Use, Death Benefits and Funds that it invests into.

What are Unit Linked Insurance Products?

Unit linked insurance products or ULIPs are hybrid financial products with the features of both investment and insurance.

With ULIPs, a part of the premium paid by the unitholder is allocated towards insurance and the rest is allocated towards investment. The part of the premium which is allocated towards the investment would then be invested in debt and equity or a combination of both according to the plan selected by the holder. Once a popular instrument, ULIPs have fallen out of favour because of their inability to make the most of their premise.

Before investing in ULIPs, one must properly analyse his/her financial goals and the returns other available options are giving.

How does ULIP work?

Unit linked insurance products have both insurance as well as investment components in them. When a person invests in ULIP, a part of the premium goes to shares, bonds etc., and the remaining amount is used to provide insurance cover to the investor. The insurance company usually has a fund manager who monitors the investments, so the investor does not have to bother himself/herself with tracking daily market movements.

ULIP also lets you change your portfolio between equity and debt based on your market knowledge or risk appetite.

Lock-in-period of ULIP

In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in period of ULIPs from 3 years to 5 years.  As insurance is a long-term product, you may not reap the benefits of the product if you don’t hold it for the full term of the plan.

Benefits of investing in ULIPs

Life Cover: The most important reason to invest in ULIPs is that you receive a life cover along with investment.

Finance Long Term Goals: ULIPs make a good investment option if you have some long-term plans like buying a new car, a house, marriage, etc. because the money is compounded.

Income Tax Benefits: It is not a well-known fact that the premium paid for a ULIP is eligible for tax benefits under Section 80C. Also, the returns on maturity are exempted from income tax.

Portfolio switch flexibility: As already mentioned above, usually ULIPs offer the option to switch between equity and debt based on your knowledge about market performance and your risk appetite.

Types of ULIPs

ULIPs can be divided on the basis of following parameters:

End Use: Based on the end use, ULIPs can be of the following types: Retirement planning, Wealth creation and Child education.

Funds that ULIPs invest into: Based on the type of funds that the product invest in, ULIPs can be of the following types: Equity funds, Debt funds and Balanced funds.

Death benefits: On the basis of death benefits offered to the policy holders, ULIPs can be of the following types: Type I ULIP and Type II ULIPs. Type I ULIPs pay more than the assured amount or the fund value, in case of demise of the policyholder, to the nominee. Type II ULIPs provide the assured amount and the fund value, in case of demise of policyholder, to the nominee.

Fees and Charges in ULIPs

The major fees and charges paid in a ULIP are:

Mortality Charges

Premium Allocation Charge

Partial Withdrawal Charge

Fund Management Charges

Policy Administration Charges

Switching your Funds Charge

ULIPs Vs Mutual Funds

Unit linked insurance products and mutual funds can be distinguished as:

FeatureULIPsMutual Funds
NatureHybrid product, offering both investment and insuranceOnly investment product
SwitchingSwitching is permitted and it is not taxableSwitching is allowed for the same fund house but the capital gains, resulted from switching, are taxable
WithdrawalWithdrawal can happen only after the lock in periodWithdrawal can happen anytime
ChargesMortality charges, fund management charge, premium allocation charge, and administration chargesNo entry load. Fund management charges are applicable. May have an exit load.