ULIP or Unit Linked Insurance Policies have emerged as ideal solutions for investors looking for insurance cover combined with an opportunity to create wealth. These plans were, however, not received well in their initial years because of the low minimum cover and high front-loaded charges and other charges by distributors. The introduction of several regulatory changes, including capping of the charges and raising of the lock-in period, besides making the policies more transparent, have changed investor perception about a ULIP.
Understanding the New Age ULIP
These policies offer insurance coverage along with a chance to create wealth through investment in varied financial instruments. The investment pattern or the asset allocation under these schemes is mandated by the policyholder based on his goals and risk-return preferences. Not only this, but these policies also come with an option of switching the investment pattern or asset allocation with changing preferences and the performance of the funds.
Although quite popular now, ULIP policies had to face a lot of heat and criticism in terms of their efficiency as insurance policies in their earlier years. But the growing realisation and acceptance of their unique features and benefits have changed the investment scenario. The best feature of a ULIP is that its investment component allows policyholders to align their investments with their changing risk tolerance levels. The transparency and the flexibility associated with ULIP performance are also viewed favourably by the investors.
Some features that make a ULIP popular are:
- Transparency About Charges– The various types of charges associated with a ULIP include premium allocation, policy maintenance, early withdrawal or surrender, switching charges, mortality, and other miscellaneous charges, have been capped at 2.25% for the first ten years of holding by the IRDAI. The insurance company must specify these charges in advance. The high distribution charges have been done away with, while the penalties for early surrender have been eliminated, thereby offering more value to the policyholders. Investors can use a ULIP return calculator to get an idea about how much to invest to get a specific level of returns.
- Lock-In Period– The mandatory lock-in period of five years instils a sense of discipline among investors who ignore the short-term market trends and stay invested to reap long-term returns.
- Multiple Investment Options– ULIPs offer investors multiple fund options to choose from. Investors have the option to divide their investments between different asset classes, like equity, debt, or money market instruments, and minimise the risk involved. Some companies even offer the auto mode wherein investor funds are invested and switched from one fund to another depending on their age and risk profile.
- Switching Option– Insurance companies offer ULIP holders an option to switch their asset allocation from one fund to another in response to a change in their risk-bearing capacity or expected returns. The switching option offered to investors helps them deal with market volatility by shifting their money from one fund to another. Asset rebalancing helps them stay invested and reap the benefits of long-term investing. Also, most insurance companies do not charge anything for these switches.
- Option to Enhance Coverage– Investors in ULIP also have the option to enhance their coverage or investment value through a top-up premium. This helps investors in using their spare money or increase in income for enhancing their coverage without taking a new policy.
- Additional Coverage– Several ULIPs offer additional coverage for accident insurance or disability or critical illness by payment of additional premiums. Some plans even offer a waiver of premium benefit in case of the demise or disability of the policyholder while paying the maturity amount at the end of the policy.
- Tax Benefits- The premium paid towards ULIP (subject to the limit of Rs 1.5 lakh per year) and the policy’s death benefit amount are eligible for tax exemption under sections 80C and 10D respectively. The latest guidelines, however, mandate that if the annual premium of a new ULIP investment is more than Rs 2.5 lakh, the income or return on maturity will be treated as capital gain and charged accordingly. This rule is applicable only for policies taken on or after 1.02.2021.
These features of the new-age ULIPs make them an attractive option for investors looking for multiple benefits in one instrument. Careful planning and appropriate investment in different funds of a ULIP allow a policyholder to fulfil many financial goals, like funding a child’s education or buying a home or saving for retirement. All this comes with a life insurance cover that ensures the financial stability of the family in case of a mishap. The introduction of online ULIPs has further simplified the process of investing in ULIPs while reducing the distribution costs associated with an offline investment in these schemes.