The BuyT Desk
What is ULIP?
A ULIP (Unit-linked Insurance Plan) is a market-linked insurance product. It provides the benefit of life insurance and at the same time its an investment. A ULIPs requires the policyholder to make regular premium payments of which part payments are utilized to provide insurance coverage. The unutilized payments are pooled with the funds from other policyholders and invested in financial securities i.e. equity and debt. Therefore, life insurance under ULIP can help you build a corpus for future financial requirements like retirement, a child’s education, and a wedding.
How does a ULIP work?
A ULIP pools money from different policyholders to create a fund. A dedicated fund manager then chooses a specific investment option as per his/her investment plan. The investment options considered for a ULIP are equity mutual funds, debt mutual funds, or hybrid mutual funds. The investor/ policyholder can choose between different ULIPs based on the fund manager’s investment plan. ULIPs offer an advantage to the investors in terms of switching the fund preference as per their needs in the investment duration.
Let us understand this with examples. Supposedly, you have diverse sources of income like a regular job and rent from properties. Now, you are ready to take risks and experience market-linked investment. In this case, you can opt for hybrid funds as an investment option under a ULIP. However, for some reason like the COVID pandemic, your rental income has been compromised. In such a scenario, you can opt for less risky funds like debt funds under a ULIP.
What are the features of a ULIP?
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Lock-in period: ULIPs have a fixed lock-in period of 5 years. However, it is best to stay invested for the complete period of the plan (10-15 years). This ensures that you gain good returns.
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Partial withdrawal: Partial withdrawal is possible during the lock-in period. You can surrender the policy while in the lock-in period but the amount will be received at the end of the lock-in period. Some insurance companies allow partial withdrawal during the lock-in period but only a fixed percentage can be withdrawn.
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Payment: On purchase of a ULIP, you require to make an initial lump sum payment. Further, the premium is paid yearly, semi-yearly, or monthly depending on the plan.
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Flexibility: ULIPs offers the flexibility to switch your fund preference. Also, it allows you to invest additional premium along with regular premium.
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Taxation: Like PPF, ULIPs came under the EEE category but this has changed in the recent budget. From 1 February 2021, if your premium or aggregate premiums for ULIPs exceed Rs.2.5 lakhs then capital gains tax will apply. For the policy held up until 1 year, a short-term capital gains tax of 15% will apply. Long-term capital gains tax of 10% will apply for policies held for more than 1 year. Additionally, upon maturity or surrender of equity-linked ULIP fund to the insurance company, a security transaction tax will also apply. There is no tax deduction from the amount paid to the nominee in the case of the death of the insured person.
What are the charges of a ULIP?
There are different types of charges for a ULIP that are deducted from your premium. It includes administrative charges, fund management, surrender charges, partial withdrawal, etc. The charges depend upon the insurance company. However, as per the guidelines of IRDAI, the insurance company distributes the charges evenly over the lock-in period. This ensures that the insured does not bear the burden of high charges at the beginning of the policy.
When and if you decide to invest in a ULIP, reap the maximum benefit by keeping a medium to high investment horizon and using the flexibility of switching the fund preference according to your requirement.
