Navigating the maze that is personal finance

Monday, 13 February 2017

ULIP (Unit Linked Insurance Plan) 101 – All that you need to know


What is it?
ULIP is a financial product providing both insurance and investment at the same time.

How does it work?
  • A part of the premium is diverted to provide life insurance to the policy holder.
  • In case of death of the policy holder either the sum assured or the fund value, whichever is  higher is paid.
  • The rest is invested in various instruments (typically mutual funds) like debt or equity or both depending on the preference that has been expressed or chosen by policy holder. Presently these options can be switched if the policy holder wishes to do so with changing risk appetite.
  • Another part of the premium goes towards other charges like allocation charge, administration charges, mortality charges etc.The part that goes as investment is allotted units with NAV which changes as the market changes on a daily basis.
Tax treatment
ULIPs are eligible for tax deduction under 80C (maximum limit 1.5 lakh) up to 10% of the sum assured or annual premium whichever is lower. You need to invest for a period of 2 years in order to avail this benefit. What this means is that if discontinue your ULIP before 2 years the deduction claimed in the earlier years will be added back to your taxable income. 

How is it different from a pure play insurance and/or investment instrument?
When you are buying an insurance product the whole premium goes towards insuring you and while buying a purely investment product like mutual funds the money goes in investment except a very small percentage that goes towards management and other charges in both cases.

How can you exit? 
Partial withdrawals from fund value are allowed after completion of five years. A particular number of withdrawals are even allowed free of cost. Some ULIPs may have lock in period and can be liquidated if required. However once dissolved the insurance also goes away, hence this should be kept in mind while buying ULIPs.

My take on ULIPs
ULIPs have higher charges when compared to those of insurance products and pure investment tools separately, you get lower overall returns and are insured for a lesser amount than you could be if you had chosen a pure insurance product. However after IRDA capped the charges that could be deducted by ULIPs, they have become more attractive than before. In ULIPs you are buying insurance and are investing at the same time. What the nominee gets in case of death of the policy holder is the sum assured or fund value whichever is higher. I personally suggest and prefer to rather buy a term insurance and an investment product separately.
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