Things You Didn't Know About ULIPs

2024-08-02

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Investments in linked insurance plans such as ULIPs (Unit Linked Insurance Plans) are taking off at breakneck speed. For instance, while the premiums for non-linked insurance products retain a flat rate of growth, those for linked insurance products showed growth at a rate of 35% CAGR for 2013-2014 to 2016-2017. A large contributor to this growth has been a growing awareness among consumers.

If you are one such potential ULIP investor, here are some little-known aspects of ULIPs to help you build further awareness:

What is a ULIP?

A Unit Linked Investment Plan is an insurance-cum-investment tool that offers the dual benefits of an insurance cover as well as investments with a single plan. A part of the premium paid towards your ULIP is spent on a life cover, while the other part is invested in funds selected as per your risk appetite. The selection and management of these funds is done through fund managers appointed by the insurer.

5 Things you probably did not know about ULIPs

Switching between funds free of charge

If you feel like the funds you have chosen are not reaping the ULIP benefits you had expected, you can switch from an equity fund to a debt fund or vice versa. Units can be transferred partially or completely between equity, debt and balanced funds. The switch could be for reducing risk or increasing returns. For new-age online ULIP, you can even avail of the switching facility online. Certain plans permit a predetermined number of free switches that can be carried out over a certain period of time. For instance, some policies allow around 6-7 switches free of charge over the course of a year, while some have done away with the cap entirely.

Your life cover will NOT reduce

It is a common myth that the life cover of a ULIP also declines if the investment component doesn’t fare well. While the returns on your investment could fall if your chosen fund doesn’t perform well, this has no bearing on the insurance component. You will receive the death benefit as initially assured, regardless of fund performance.

Triple Exemptions

It’s a little known fact that ULIPs hold the rare EEE (Exempt-Exempt-Exempt) status. From premiums to the payouts, ULIP enjoy tax benefits. Under Section 80C of the Income Tax Act, the premiums you pay towards the policy are tax-deductible, while under Section 10(10D), the maturity proceeds are exempted. Additionally, while LTCG (Long Term Capital Gains) tax is applicable on most market-linked instruments (like ELSS), ULIPs are tax-free in this regard, largely due to the fact that they are viewed as insurance products and not investment ones. This gives them considerable leverage over other such instruments.

Cap on charges

There are certain costs associated with the workings of a ULIP.

These include:

fund management charge
premium allocation charge
mortality charge
switching charge
policy administration charge
partial withdrawal charge
discontinuance charge
miscellaneous charges, etc.

These charges are deducted in the form of units of the fund value, which means that too many charges could bring down your ULIP benefits i.e. your returns. While this may be off-putting for potential investors, a commonly unknown aspect of these charges is that they have a cap. The net reduction in yield (RIY) for policies with a term of 10 years or less cannot be more than 3% at the time of maturity.

Despite this, it always a good practice to make sure you enquire about the number of charges levied and the amounts of these charges before buying a plan.

ULIPs can be safe investments

Conservative investors shy away from opting for ULIPs due to the belief that they are risky market instruments. This is far from the truth. The power to control the risk scale of a ULIP is entirely in your hands. If you want to take a chance at earning greater ULIP benefits at greater risk, you can invest in equity-oriented funds. If you want to play things safe, you can opt for debt-oriented funds. At almost any point, you can redirect your funds as well. Thus, the risk associated with a ULIP totally depends upon your risk appetite.

These are some of the most important things that you take into account before deciding which plan to invest in.

Once you decide to give ULIPs a shot, you can browse through scores of productive ULIPs available online, such as the Invest 4G plan.

Invest 4G plan

Invest 4G by Canara HSBC is a plan that offers a wide range of choices in various aspects. You can pick from a roster of 7 different funds, and apply any of the 4 portfolio strategies to aim for maximum returns. This plan also gives you the option of partially withdrawing your funds in the event of a contingency. Moreover, there are Loyalty Additions, Wealth Boosters, and Return of Mortality Charges options to boost your investment even further.

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