The Complete Guide on Unit Linked Insurance Plan (ULIP)

Posted by  Fintra , updated 2021-12-06

In this fast-moving world, expenses are sky-rocking due to expensive health care treatments and a high standard of lifestyles. Thus, it has become very crucial to seek financial instruments that provide comprehensive insurance coverage and investment benefits - All in one package. Fortunately, there is one financial instrument that provides dual benefits of insurance and investment, it's Unit Linked Insurance Plans (ULIP).

ULIP, a multi-faceted life insurance product, consists of a blend of life insurance and investment. It requires policyholders to make premium payments regularly. Part of the payment gets utilized to provide life insurance coverage while the remaining is pooled with assets that are received from other policyholders and then get invested in financial instruments such as equity and debt, similar to mutual funds.

In this blog, we'll highlight everything about ULIP by covering the following topics:

1. What is a ULIP (Unit Linked Insurance Plan)?
2. Who should invest in ULIP?
3. How Is ULIP Structured And How It Works?
4. What Type of Funds do ULIP Plans Offer?
5. How to Choose the Best ULIP plans?
6. Benefits of ULIPs
7. How to Claim Tax on Unit Linked Insurance Plan?
8. Why Invest in ULIP?
9. Types of ULIP Plans
10. Steps to Buy a ULIP Plan Online
11. ULIP Charges
12. What is ULIP NAV?

What is a ULIP (Unit Linked Insurance Plan)?

A Unit Linked Insurance Plan (ULIP) is the financial instrument that gives the dual functions of insurance and investment within the same plan. When you invest in it or pay the premiums of it, a small portion of it goes towards the life insurance component, and the rest gets systematically invested. This investment is offered by the insurer in various qualified investments in varying proportions of equity and debt stocks, which is similar to mutual funds. The returns on the investments depend on the fund's performances. 

In the year 2010, the Insurance Regulatory and Development Authority of India (IRDAI) made one vital change in ULIPs, it increased the lock-in period from 3 years to 5 years. However, since insurance is believed to be a long-term product, as an investor you might not be able to obtain the benefits of the policy unless you hold it for the policy's entire term, which may range from 10 to 15 years.

In ULIP plans, investments are subjected to risks associated with the capital market. Policyholders have to bear the investment risks on their investment portfolios. Hence, Fintra experts recommend to do investments based on the needs and the risk appetite. One another factor to take into consideration is the future requirements of your invested funds. Moreover, a Unit Linked Plan is extremely transparent, its charges including fund management charges, allocation charges, etc. are stated upfront. ULIP even enables its investors to switch their investment from equity to debt and vice-versa very conveniently and easily without having any worries of being charged.

In India, ULIP was initially introduced by the Unit Trust of India (UTI) in 1971, but since 2010, ULIPs began to get regulated and managed by the Insurance Regulatory and Development Authority of India (IRDAI). In the beginning, although many investors were staying away from investing in ULIPs because of their associated high charges, however. In recent times, a few of the major life insurance providers like HDFC, Bajaj Life, ICICI Pru, and Edelweiss Tokio designed new and improvised ULIP products consisting of minimal charges and multiple features to ensure maximum returns along with comprehensive insurance protection for the investors. A Unit Link Insurance Plan (ULIP) also enables investors to claim an 80C deduction.

Who should invest in ULIP?  

Individuals who are seeking dual benefits, investment, and coverage, can opt for ULIPs.

With a ULIP, it's guaranteed the funds won't just gather but they'll be also actively used to boost up an individual's wealth. ULIP provides results for both, savings and investments, which are considered the most essential wealth management aspects.

The following details highlight the ULIPs for different categories of investors:

A. Investors with Varying Risk Appetites: ULIP plans offer a variety of funds options, equity, debt, and a mixture of both, to pick from for all sorts of consumers. For example, if you're an aggressive investor willing to take high risks, you can opt for equity funds because they give higher returns. On the other hand, debt funds are known to be less risky and they provide lower returns. Hence, for this reason, ULIP plans are known to be popular because they cater to all types of investors, from risk-averse investors to investors who have a healthy risk appetite. To purchase the best ULIP plan, one is required to keep a track of the historical ULIP NAV because it will help in understanding which one to invest in. In short, if you're seeking an avenue to investment along with insurance, then you will find ULIPs to be the right choice because you'll gain lots from superior market returns along with having insurance cover.

B. Investors with Medium to Long Term Investment Horizon: ULIPs are an ideal choice for those who wish to invest in long-term investments. It's advised to obtain the best returns from these plans, you must invest in medium to lifelong investment horizons. In any case, such plans have a compulsory lock-in period of 5 years, and if you desire to build a corpus for future requirements, then ULIPs will be a good choice due to their long-term outlook. Investors may track the ULIP NAV, the total value of the fund and the equity-debt allocation to determine the best ULIP plan for themselves.

C. Hands-On Investors: As a policyholder, ULIP enables you to closely monitor the portfolio. Since every insurance company offers the ULIP NAV on its website, it becomes easier to determine which is the best ULIP plan that suits your needs. Due to the flexibility of switching between equity, debt, and balanced funds with varying risk-return profiles, the hands-on informed investors will discover ULIPs to be the best investment plan as they can keep close tabs on their investments and do changes based on how the market is performing. One additional advantage to these ULIP plans is the fact that they also offer insurance cover.

D. Investors across All Life Stages: ULIP plans make an ideal choice for all types of investors at various stages in life because ULIP plans are available depending on each individual's requirements and situations. Following are some examples:

• For single people, the necessity for creating wealth and accumulation is higher than availing insurance coverage. Hence, to satisfy such people's needs, they can opt for a ULIP plan having low death benefits and allocating equity-focused investment funds. Moreover, keeping track of ULIP NAV will enable them to maximize returns by picking the best ULIP plans suiting their requirements.
• For married couples who have no children have medium protection requirements but they do have a higher need for creating wealth. Hence, these individuals can opt for a ULIP plan with high death benefits and picking growth or balanced investment funds for creating wealth. On the other hand, for those who are married and are parents, their need for protection is high along with the requirement for asset creation to save for their children. To achieve this need they can opt for a ULIP plan that has an increased death benefit and select riders for enhancing protection in addition to going for balanced funds for asset creation. regularly monitoring the ULIP NAV will assist them in optimizing their fund allocation through the years.
• Individuals who are well settled in their jobs and have children attending school will have high protection along with wealth creation needs. Their requirement for liquidity will also be high for meeting their child’s requirements. Hence, for such a situation, experts will advise opting for a ULIP plan that enables them to make partial withdrawals to meet such liquidity requirements.
• For middle-aged individuals who have children that are ready to pursue higher education, planning to begin a business, or desiring to get married their need for protection is in the medium range. They require lump sum money to satisfy such responsibilities and this can be achieved by opting for ULIP plans that allow partial withdrawals.
• Individuals nearing retirement and having children who're independent will have low protection needs. They simply require a safe accumulation of funds for post-retirement needs. Hence, such individuals can opt for debt-oriented funds and a lower death benefit ULIP plan. For these people, they can opt for a ULIP plan that gives them regular returns without worrying about the ULIP NAV.

How Is ULIP Structured And How It Works?

Investment options under the ULIP function and are structured similarly to mutual funds. ULIP plans pool investments from various investors before getting allotted to various fund options based on the individual's preferences. Dedicated fund managers, who focus on accomplishing specified investment objectives administer the assets under these plans. You as an investor can purchase shares or 'units' in a single strategy or you may choose to diversify investments across several market-linked ULIP funds.

If you desire to purchase a ULIP fund, you have to first make an initial lump sum payment. Subsequently, you are required to make premium payments towards the plan either annually, semi-annually, or monthly. The premium payment may vary from one ULIP plan to another. Premiums invested in a plan get proportionally invested towards a designated investment mandate. However, such plans provide flexibility to the investors, they can freely adjust their fund preferences depending on their requirements throughout the investment duration.

What Type of Funds do ULIP Plans Offer?

Insurance companies provide an array of funds from which one can select any one option based on their investment objectives, time horizon, and risk profile. Each of the funds possesses various risk elements and consequently offers different returns.

The common types of funds available with their risk characteristics are as follows:

• Cash Funds: Sometimes referred to as Money Market Funds, Cash funds fall under the low-risk category and are invested in cash, bank deposits, and money market instruments, which have a lower risk.
• Debt Funds- Income, Fixed Interest, and Bond Funds: These come in the medium risk category and they're invested in debt instruments such as government securities, corporate bonds, and other low-risk fixed income instruments. In comparison to equity, the returns on these types of funds are lower as well as the risk. However, the returns from these funds are a little higher than the cash funds.
• Balanced or Hybrid Funds: These funds combine equity investment and fixed interest instruments. In nature wise, these funds possess medium risk. Hybrid funds provide sufficient exposure to stock markets and debt instruments. In equity funds, the risk intrinsic is counterbalanced by the safer investments in debt. 
• Equity Funds: These ULIP funds come under the category of medium to high-risk because they're primarily invested in company stocks to gain capital appreciation. Since these funds are invested in stock markets, their performance is in line with the lows and highs due to the volatility presented in the stock market.

How to Choose the Best ULIP plans?

Before selecting and purchasing a ULIP plan, as an investor, there are a few pointers to consider. They are as follows:

Analysis of Personal Investment Goals 

Before picking a ULIP plan, as an investor, it'll be a wise thing to analyze your long-term financial goals. Without any doubt, it's compulsory to go ahead with a ULIP that is in sync with your investment horizon and investment goals. 

Decide Insurance Objectives 

You must first determine your insurance objectives before selecting a ULIP plan which fulfils them. If you're young, then current and future family requirements are to be considered because insurance cover must be adequate to fulfil the needs if at all something happens to the insured. It is essential to understand since ULIP is a long-term investment product, you have to be clear about the insurance and investment objectives when investing funds in a ULIP to obtain maximum benefits from the investment. 

Decide Investment Goals 

Having investment goals is extremely vital. It is advised to devote sufficient time and think about these goals and finalizing them. If this step is done well, it'll then make the whole process of choosing ULIPs extremely easy. For example, these goals can vary from having a corpus for higher education requirements for children and later have enough funds for their marriage. They may even include having sufficient funds for post-retirement needs. Hence, you must give utmost importance to your investment goals, because when these goals get decided, you can seek for ULIPs with their benefits that fulfil the goals adequately. 

Compare ULIPs 

Every ULIP has its own set of features and benefits, thus, a thorough comparison is required in order to determine the one plan which best suits one’s requirements. One can do a comparison in the traditional offline way or online using the various online insurance comparison portals. These websites will compare and rank the various plans provided by insurance companies on parameters like policy term, sum assured value, different charges, and various other elements will be brought to the fore so you can obtain a clear idea of each plan. To make a wise decision, you can even use an online ULIP Calculator to calculate returns on the investment. 

Flexibility 

One another factor to consider while picking a ULIP plan is its flexibility option which is offered by the intended unit-linked plan. Following are two points to take into account while comparing ULIP plans on the parameters of flexibility: 

A. Policy Tenure Flexibility: Various ULIP plans are long-term; thereby, they have a lock-in period of 3 to 5 years. Before investing, you must analyze the investment horizon, and based on the expected period of the investment, you must select the best ULIP from the variety of plans available at your disposal. 

B. Investment Flexibility: ULIP enables policyholders to select investment options before they actually make an investment in their desired unit-linked insurance plans. Based on the risk appetite, the policyholder can opt for either hybrid, equity, or debt ULIP plans. 

Evaluate Risk Profile and Financial Stability 

Before choosing a ULIP plan, it's vital to evaluate your risk profile and financial stability. For example, younger people will typically have a higher risk appetite and they probably can opt for plans that are more equity focussed to the extent of 100% equity allocation. People whose financial stability is of prime importance will be suited to go with a plan that primarily invests in debt instruments as it provides stability though with limited returns. 

Understand Various Charges Levied 

While choosing a ULIP plan from the various plans available in the market, get to know its charges well. The charges will be the initial charges, premium allocation fee, fund management fee, surrender charges, mortality charges, and administration and service charges. When having the proper knowledge and information about the charges will help you to filter and select the right ULIP plan. 

Be Well-Versed with the Benefits and Features of a ULIP Plan 

Since each ULIP plan is different, each one has its distinct features and benefits. Having proper knowledge about the pros and cons of each plan will make the decision of choosing a ULIP plan very easy. You'll be able to find a plan that suits your requirements if the characteristics are understood well. 

Check the Plan's Performance 

Knowing the performance of a ULIP plan will also be a good idea. Refer to the performance of the last three to four years while selecting a plan because it will give a fair idea about the returns you can expect to get from the plan. Do compare the returns to benchmark the indices like the Sensex of the BSE and the Nifty of the NSE. 

Solvency Ratio 

The solvency ratio of an insurance company reveals the fact of whether the company will be able to honour its claims in the future or not. As per the IRDA guidelines, insurance companies should have a solvency ratio of at least 1.5. 

Claim Settlement Ratio 

This refers to the portion of claims settled by the insurance company as compared to the total numbers of claims the company has received. 

Performance of ULIP Funds 

Since ULIP is an investment cum insurance product, the insurance holders need to evaluate the funds' performance over the long-term. In a ULIP plan, a policyholder has the option to either invest in equity, balanced, or debt fund as per its risk appetite and investment time horizon. By monitoring the fund performance, investors will be able to make better investment decisions along with gaining maximum returns on investments over a long-term period.

Investment Strategies Offered 

Various ULIP plans do provide the opportunity to make a strategic investment. For example, if one desires to build a financial cushion for retirement then it'll be advised for him/her to invest in a retirement ULIP plan or if the individual desires to invest for providing financial security to their child then it can invest in a child ULIP plan. 

Benefits of ULIPs

ULIP plans furnish individuals with opportunities to invest in various market-related securities like equity, debt, and balanced funds to receive long-term investment returns. It can invest in a variety of fund options depending upon its risk appetite and investment objectives.

Following are some benefits of ULIP plans:

1. Life Protection, Savings, and Investment

Investing in ULIPs enables you to inculcate the habit of saving along with investing- both these habits are essential in building long-term wealth. They give the dual benefit of having life insurance cover and savings at market-linked returns. While feeling safe with having life protection, you can invest in a wide range of market funds that can earn a high rate of return.

2. Market-linked Returns

ULIP plans offer an opportunity to gain market-linked returns. A portion of the premium paid towards a ULIP plan gets invested in funds that invest in diverse market instruments such as debt and equity in varying proportions. The policyholder earns returns based on the market's performance of the funds. Investors may use the data like the ULIP NAV to monitor the returns and ensure they're staying invested in the best ULIP plans.

3. Investment and Insurance Benefits

Unit Linked Insurance Plan provides triple benefits that include investment, life cover, and tax savings. In other words, an investor gets to benefit from a comprehensive life cover based on its preferences and budget and obtain market-linked returns on the investment.

4. Death Benefits

These plans also offer death benefits if the insured person passes away during the policy term. Based on the reasons for the demise of the insured the death benefits will differ.

5. Maturity Benefits

Maturity benefits come packed with a ULIP plan if the policyholder endures the maturity period of the plan. Normally, maturity benefits are provisioned as a sum of the value of the fund. However, a few insurance companies may provide add-on benefits based on the terms and conditions.

6. Long-term Investment Benefits

For those seeking to earn maximum returns on investments that are long-term, ULIP plans are indeed one of the most sought-after investment instruments. As we know market volatility and fluctuations will impact on the returns in the short-term, hence keeping an investment for a longer period will make it easier for an individual to deal with the market volatility and earn a high rate of returns on its investment. ULIPs permit long-term investments and makes it simpler for an investor to obtain the maximum returns on the investments. 

7. Withdrawal Benefits

When there's an emergency and you need to withdraw funds, a ULIP plan becomes your best source of ATM. It allows you to withdraw a part of the investments in case of emergency, after reaching the completion of a pre-determined timeline. Usually, such withdrawals are claimed to be tax-free. 

8. Tax Deductions Benefits

ULIPs also consist of tax benefits. All the premiums paid towards the ULIP plans are eligible for tax deduction under Section 80C of income tax 1961, up to a maximum of Rs. 1.5 lakh. Even the maturity/death benefit received is tax-exempt under Section 10(10D) of the Income Tax Act 1961.

How to Claim Tax on Unit Linked Insurance Plan?

If there's a sudden demise of the insured due to reasons covered under the policy, you are required to make claims. One must be aware of the process to make it a smooth one. Following are the steps to undertake in such situations:

• If any unfortunate incident occurs, you must immediately inform the insurance company
• After registering the claim, provide the required documents along with the claim form
• When the case gets verified by the company, it will transfer the payment to the desired account
• If there's any doubt, the claim can also be declined

Why Invest in ULIP?  

One can plan to invest in ULIP because it combines two benefits, insurance and investment, in one financial instrument. By all means, they can be the preferred choice to opt for because they turn out to be better than insurance or investment alone. Consisting of the features of a life insurance cover, ULIP even provides the option of earning market-linked returns. Following are summaries of the few benefits of investing in ULIPs: 

Higher Returns

ULIP plans provide higher returns. Investors can expect 12%-15% returns from their investment for a tenure of 10 years. This is because ULIP offers numerous options such as balanced funds, equity funds, or debt funds. Based on the risk appetite, an investor may choose to invest in one of the mentioned options. These plans also allow switching between the funds, and by doing this the investor can obtain higher returns on the amount invested by them.

ULIP Helps to Avoid the Everyday Hassle of Managing Stocks

Investing in equity-based market funds will give a higher rate of returns and you won't have to bother about monitoring the stocks every day. It'll be the insurance company and its fund managers responsibility to do the monitoring. They'll also use their expertise in fund management. Policyholders easily can keep a tab on their portfolio by using simple tools such as the ULIP NAV.

Multiple Fund Options to Choose From

ULIPs provides multiple fund options at your disposal. You have the option of choosing the type of fund in which premiums will be invested. These can be debt or equity or the combination of the two in varying ratios. To easily learn which ULIP plans are best for you, do glance at the historical returns of the funds and the ULIP NAV. Depending on your risk-taking ability along with the changing life and financial situations you can choose to switch the funds that will suit the new scenario. Equity-focused funds are apt for individuals who have a higher risk appetite while debt-focused funds are more suitable for risk-averse people who desire guaranteed returns.

Transparency

One of the advantages of a ULIP plan is its characteristic of being an extremely transparent financial product. Unlike the other plans where information isn't much shared with the policyholder, in ULIP the policyholder receives information about all the charges that are levied. By analyzing and understanding easily the ULIP NAV along with the historical returns, the numbers will assist select the best ULIP plans efficiently. Moreover, the policyholder gets to clearly know where the current account stands.

Liquidity

Being a fairly liquid investment product, ULIP plans do offer the facility of making a partial withdrawal of money. Each fund's ULIP NAV is usually displayed on the insurance company's website. Examining the ULIP NAV numbers will assist to align the insurance cover and investment with the overall needs.

Low Surrender Charges

The surrender charges refer to the pay you must make if you're surrendering a policy. If a situation pop-ups where you find yourself stuck with a plan which is no longer suitable, you can bear the surrender charges and get rid of a policy.

Life Cover

By investing in ULIPs the individual gets life cover along with investment. These plans provide security which a taxpayer’s family can rely upon in case of emergencies.

Income tax benefits

Premiums paid towards ULIPs are eligible for tax deductions under Section 80C. Even the returns received upon maturity are exempt from income tax under Section 10(10D) of the Income-tax Act.

Types of ULIP Plans  

ULIPs are classified based on the purpose they serve: 

• ULIP for Retirement: For this plan, the individual has to make payments during the tenure along with their employer. These payments are automatically gathered in a corpus amount, which is then paid out in the form of annuities to the individual after retirement.
• ULIPs for Wealth Collection: This plan's main agenda is to accumulate an individual's wealth over a period of time. These plans are advised for those who are in their late twenties and early thirties. Moreover, by investing in this ULIP, they get the flexibility to finance any of their future financial goals.
• ULIP for Children Education: Every parent desires to ensure that nothing affects their child’s overall education in any condition. Hence, there are various ULIP plans providing money in tiny chunks when there's a need in the children’s life. This ensures no unforeseen event hinders their life.
• ULIPs for Health Benefits: Along with providing common benefits, ULIPs also provide financial assistance for medical emergencies.

Steps to Buy a ULIP Plan Online

ULIP plans, just like any other life insurance product, can also be purchased online in a simple, hassle-free manner. The steps to purchase ULIP plans online are as follows:

1. Visit the insurance company's official website
2. Select the ULIP plan you desire to invest in
3. Pick the policy tenure and premium payment tenure 
4. Proceed to make the payment
5. Do note there are three modes of payments to choose from- monthly, half-yearly, and yearly
6. Investors can make the payment via their debit card, credit card, online wallet, or net banking

ULIP Charges

For every investment, various charges are required to be paid. In the case of ULIP, the charges are broadly classified as the following:

A. Premium Allocation Charge

This type of charge gets deducted as a fixed percentage from the premium that is paid during the primary years of the policy. Do note this will be charged at a higher rate. These charges include the initial and renewal expenses along with the intermediary commission expenses. Since it is deducted from the premium paid, it is a front-load charge.

 B. Mortality Charges

This charge is made to provide the insurance coverage under the plan. The charges depend on several factors such as age, the sum assured, etc., and it gets deducted on monthly basis.

 C. Fund Management Charges

The Fund Management Charge refers to the fee imposed by the insurance company for managing the various funds in the plan. This is levied for the management of the funds and gets deducted before reaching the NAV figure. Generally, the insurers levy the maximum amount allotted in equity funds, and the charge on non-equity funds is much lower.

 D. Partial Withdrawal Charge

Although ULIPs allow partial withdrawals of funds, some may offer unlimited withdrawals, but some may restrict it to just 2-4 withdrawals. These withdrawals will be free up to a certain limit and once the limit has been reached charges will be applied based on the individual's transactions.

 E. Switching your funds

Switching refers to the moving of investments or funds between options. There are options to switch the funds for free up to a certain limit per year, and if any further changes are made, it can incur a charge of approximately Rs. 100-Rs.250 per switch.

 F. Policy administration charges

These charges are levied for the administration of the policy and they get deducted every month by the cancellation of units from all funds that have been chosen. This charge may get levied at a fixed rate or as a percentage of the premium.

What is ULIP NAV? 

ULIP NAV refers to the Net Asset Value (NAV) of each unit of a ULIP fund on a particular day. Insurance companies do display the ULIP NAV of each fund on their websites. In other words, ULIP NAV equals the assets minus the liabilities. The assets used to calculate the ULIP NAV include the market value of investments that are held by the insurance company’s fund, the value of the fund’s current assets, and any accrued income. The liabilities used to calculate the ULIP NAV include current liabilities, fund management charges, provisions, and service tax. To calculate the ULIP NAV of a single unit, the ULIP NAV of the whole fund has to be divided by the number of units in the fund on the valuation date. The results will be the ULIP NAV per unit. 

In 2013 as per a directive of IRDA, the equity shares valuation is now calculated on the company’s shares closing price on the National Stock Exchange (NSE). If security isn't traded or listed on the NSE, then the closing price of the Bombay Stock Exchange (BSE) or the secondary exchange will be used for the computation of ULIP NAV. 

Similar to mutual funds, ULIP policyholders are also assigned units. Each of these units has a NAV which is determined and declared daily. Moreover, it's the value on which the net rate of returns on ULIPs is determined. ULIP NAV can vary from one ULIP to another because it is based on the current market conditions and the fund's performance. 

Conclusion

As the above information reveals, ULIPs do shine out from the rest of the financial instruments because they offer benefits of both, life cover and investments. This is a convenient way for an individual to enter the market and acquire benefits through risk-bearing along with assigning the task to the professionals. Moreover, under these plans, one can also have tax exemptions and the flexibility of choosing funds to invest in. ULIPs allow the investor to have more control by enabling the person to track its portfolio performance, too. 

Fintra aims to provide profound assistance to every investor with regards to all ULIP plans that will be handy while you're attempting to find the most suitable ULIP. With the innovation of modern technology and the Internet, life insurance companies have now enabled ULIPs to be easily bought with a click of the mouse. These online ULIPs are cost-efficient instruments and also provide insurance cover throughout the policy term. With the various ULIP calculators found online, you can now easily compute the returns on varied ULIP plans. This eases the whole comparison process of ULIP plans in India.