(Illustration: Sudhir Shetty)
(Illustration: Sudhir Shetty)

Decoding unit-linked insurance plans

  • As the name suggests, Ulips are marketlinked
  • There are broadly two kinds of Ulips— pension and endowments

WHAT IS IT?

Unit-linked insurance plans or Ulips are products sold to you by insurers which area combination of a pure life insurance policy and a marketlinked investment product. “As the name suggests, Ulips are marketlinked. A part of the premium you pay to your insurer, certain portion gets allocated to equity or debt funds," said Dheeraj Sehgal, chief institutional business officer, Bajaj Allianz Life Insurance. The product basically provides you with a mix of insurance and investment in the same product. The product has a five-year lock-in period. “You are allowed to pick from a large-, mid- or small-cap, debt or balanced investment depending on your risk appetite," said Anup Seth, chief retail officer, Edelweiss Tokio Life. You are also allowed to switch between different funds.

TYPES OF ULIPS

There are broadly two kinds of Ulips— pension and endowments. “The pension Ulips have a fund accumulation part and the matured amount has to be invested in annuities. The endowment Ulip also has fund accumulation, but the fund value can be drawn down freely after five years. This Ulip also has a death benefit. Both have a choice of funds to select from," said Kapil Mehta, co-founder, Securenow. Ulips can also be categorised on the basis of the kind of funds they invest in. Bond funds, where your money will be invested in government, corporate and fixed income bonds; equity funds, where money will be invested in company stocks; and balanced funds, where there will be a mix of both and cash funds, which invest in cash and bank deposits. Ulips can also be classified based on investment strategy.

CHARGES AND TAXES

The charges for investing in Ulips have come a long way since the product was introduced.

“Around 15 years back when Ulips were introduced in the Indian market, they were being charged at 40-50% in the industry," said Sehgal.

In 2010, there was both regulatory and industry intervention for the exorbitant charges. “There are four kinds of charges in Ulip—allocation, policy administration, mortality and fund management charges," said Seth. The fund management charges are capped at 1.35%. You can claim tax exemption on Ulips.

“Ulips are exempted from LTCG (longterm capital gains) taxation that was introduced in last year’s budget. It is an EEE (exempt-exempt-exempt) product and you can also claim tax exemption under section 80C."

SHOULD YOU INVEST?

The decision to invest in Ulips depends on whether you look at the product as an investment vehicle or life cover. “You should have a disciplined long-term savings perspective and should be looking for market-linked products," said Sehgal. However, the many charges and the five-year lock-in period may be a deterrent. “Looking at Ulips solely as a life cover product is not right because the insurance amount is limited to 10-15 times the premium amount. The premium for the 1 crore cover in Ulips would be 2-3 lakh," said Melvin Joseph, founder of Finvin Financial Planners. For a term life plan of 1 crore, the premiums are in the range of 7,000-8,000. “When it comes to Ulips as an investment product, the five-year lock-in is an issue as mutual funds have flexibility in exit routes," he said.

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