- Date : 16/06/2020
- Read: 6 mins
Thinking of investing in ULIPs? Here are some of the most commonly asked ULIP questions answered by experts.
ULIP stands for Unit-linked Insurance Plan. It is a combination product, and the premiums serve a dual purpose of fulfilling two primary requirements – insurance and investment. The life cover has a Sum Assured that will protect your family against any unforeseen eventualities. The premium that is directed towards the investment creates wealth.
Common Queries About ULIPs
Even though ULIPs have gained a ton of popularity in the last few years, there are a few common questions that still need to be answered.
Let's take a look at the answers to some of these questions.
1. How is ULIP a life insurance and investment product all at once?
The premium paid towards your ULIP plan is used to in two ways. A part of the premium goes towards your life cover, whereas the remaining amount is invested in markets to generate returns and create wealth.
2. What are the types of funds that your part premium for ULIPs is invested in?
Investing in unit-linked plans allows you the flexibility of fund allocation. You can modify your investments according to your needs and risk appetite. Investors can opt to contribute through small monthly payments in a systematic fashion as opposed to investing a higher amount, yearly.
The additional benefit of switching between debt, equity and mixed funds is that it allows you to create wealth even when there are market fluctuations.
Related: 8 Charges you must know before investing in ULIPs.
3. Are there any charges or fees involved with ULIPs?
Here is the list of fees and charges that you can expect to pay when you are investing in a ULIP:
- Premium allocation charges imply that a percentage of the premium is allocated to offset distributor, underwriting, medical expenses, etc., of your insurer.
- Mortality charges are generally extended towards offering life insurance cover.
- Fund management charges capped at 1.5% on the fund’s value are levied for switching the fund multiple times in your ULIP plan which is subtracted prior to NAV calculation
- Surrender charges ranging between Rs. 1000 and Rs. 3000 are applicable only if the policyholder encashes the units prematurely
- Policy administration charges are levied towards administrative expenses incurred on the policy.
- Switching charges vary between Rs. 100 to Rs. 500 per switch is applied every time the insurer switches fund.
4. Is there a lock-in period with ULIPs?
There is a minimum 5 year lock-in period for ULIPs. This encourages investors to continue with their long-term investments.
5. Is it safe to invest in ULIP?
ULIPs are regulated by the Insurance Regulatory and Development Authority of India and are amongst the safest investment products. Other than combining the benefit of insurance and investment, they also allow the policyholder to choose the level of equity exposure basis their risk appetite.
Some ULIPs may also offer a capital guarantee on the premiums paid.
6. Is ULIP better than PPF?
ULIP and PPF are completely different investment options. PPF is a debt based product that is primarily geared towards retirement planning. A ULIP is a multi-dimensional investment with a combination of insurance and investment that secures both you and your family’s financial goals. This could be saving for a house, paying for education or marriage and even retirement.
You need to evaluate your need for either investment basis your goal, time horizon and risk appetite.
8. Are there any maturity or death benefits associated with ULIPs?
Death and maturity benefits are offered with ULIPs. If the policyholder meets with an untimely demise prior to the maturity of the term, the beneficiary receives the fund value, or the Sum Assured, depending on whichever is higher or even both in some cases. Once the policy matures, the policyholder gets the fund value or the Sum Assured, again, whichever is higher as per the terms of the policy. Both of these benefits are tax-free.
9. Can equity exposure in ULIPs be minimised when the aspired goal is near completion?
You can choose to switch between equity and debt funds.
Typically, policyholders opt for fund switches when they see that a specific fund is not performing well. Some ULIPs may only offer a restricted number of switches as opposed to unlimited ones. A switching charge is applicable when this exercise is carried out, which depends on the insurance company.
Related: How Ulip can help in meeting long-term goals
10. Do ULIPs guarantee returns?
In the long run, being invested in ULIPs gives your investment the time that it needs to activate the power of compounding. This helps your investment to grow by process of adding your gains to your initial investment. Subsequently, any profits gained are also reinvested until such time that you choose to hold on to the policy.
The aim is to get better returns in the long run with ULIPs. However, returns are not guaranteed since it is a market-linked product.
11. Should I surrender my ULIP?
You can surrender your ULIP post the five-year lock-in period. However, it may not be the smartest decision since a significant part of the premiums will be absorbed in covering fees and charges accrued over the first five years.
12. Can I stop my ULIP?
Yes, for any reason you wish to discontinue your ULIP, you can send a request for ‘withdrawal of policy’ to the insurer. However, you will only be able to receive the proceeds from the investment after completing the 5 year lock-in period.
13. Is LTCG tax applicable on ULIP gains?
There is no LTCG tax applicable on any ULIP gains.
ULIPs and ELSS are easily confused as interchangeable concepts but are completely different from each other. Unit-linked plans offer life cover, which is not the case with mutual funds. This is the biggest differentiator that helps investors choose ULIPs as the go-to investment instrument today. Take a look at everything you need to know about ULIP's to understand this investment and insurance instrument comprehensively.
14. What are the tax benefits of investing in ULIP?
The premium paid on a ULIP is eligible for a deduction up to a maximum of Rs 1.5 lakhs per year under section 80C of Income Tax Act. The amount received by the investor on maturity is exempted from tax under Section 10(10D).
ULIP stands for Unit-linked Insurance Plan. It is a combination product, and the premiums serve a dual purpose of fulfilling two primary requirements – insurance and investment. The life cover has a Sum Assured that will protect your family against any unforeseen eventualities. The premium that is directed towards the investment creates wealth.
Common Queries About ULIPs
Even though ULIPs have gained a ton of popularity in the last few years, there are a few common questions that still need to be answered.
Let's take a look at the answers to some of these questions.
1. How is ULIP a life insurance and investment product all at once?
The premium paid towards your ULIP plan is used to in two ways. A part of the premium goes towards your life cover, whereas the remaining amount is invested in markets to generate returns and create wealth.
2. What are the types of funds that your part premium for ULIPs is invested in?
Investing in unit-linked plans allows you the flexibility of fund allocation. You can modify your investments according to your needs and risk appetite. Investors can opt to contribute through small monthly payments in a systematic fashion as opposed to investing a higher amount, yearly.
The additional benefit of switching between debt, equity and mixed funds is that it allows you to create wealth even when there are market fluctuations.
Related: 8 Charges you must know before investing in ULIPs.
3. Are there any charges or fees involved with ULIPs?
Here is the list of fees and charges that you can expect to pay when you are investing in a ULIP:
- Premium allocation charges imply that a percentage of the premium is allocated to offset distributor, underwriting, medical expenses, etc., of your insurer.
- Mortality charges are generally extended towards offering life insurance cover.
- Fund management charges capped at 1.5% on the fund’s value are levied for switching the fund multiple times in your ULIP plan which is subtracted prior to NAV calculation
- Surrender charges ranging between Rs. 1000 and Rs. 3000 are applicable only if the policyholder encashes the units prematurely
- Policy administration charges are levied towards administrative expenses incurred on the policy.
- Switching charges vary between Rs. 100 to Rs. 500 per switch is applied every time the insurer switches fund.
4. Is there a lock-in period with ULIPs?
There is a minimum 5 year lock-in period for ULIPs. This encourages investors to continue with their long-term investments.
5. Is it safe to invest in ULIP?
ULIPs are regulated by the Insurance Regulatory and Development Authority of India and are amongst the safest investment products. Other than combining the benefit of insurance and investment, they also allow the policyholder to choose the level of equity exposure basis their risk appetite.
Some ULIPs may also offer a capital guarantee on the premiums paid.
6. Is ULIP better than PPF?
ULIP and PPF are completely different investment options. PPF is a debt based product that is primarily geared towards retirement planning. A ULIP is a multi-dimensional investment with a combination of insurance and investment that secures both you and your family’s financial goals. This could be saving for a house, paying for education or marriage and even retirement.
You need to evaluate your need for either investment basis your goal, time horizon and risk appetite.
8. Are there any maturity or death benefits associated with ULIPs?
Death and maturity benefits are offered with ULIPs. If the policyholder meets with an untimely demise prior to the maturity of the term, the beneficiary receives the fund value, or the Sum Assured, depending on whichever is higher or even both in some cases. Once the policy matures, the policyholder gets the fund value or the Sum Assured, again, whichever is higher as per the terms of the policy. Both of these benefits are tax-free.
9. Can equity exposure in ULIPs be minimised when the aspired goal is near completion?
You can choose to switch between equity and debt funds.
Typically, policyholders opt for fund switches when they see that a specific fund is not performing well. Some ULIPs may only offer a restricted number of switches as opposed to unlimited ones. A switching charge is applicable when this exercise is carried out, which depends on the insurance company.
Related: How Ulip can help in meeting long-term goals
10. Do ULIPs guarantee returns?
In the long run, being invested in ULIPs gives your investment the time that it needs to activate the power of compounding. This helps your investment to grow by process of adding your gains to your initial investment. Subsequently, any profits gained are also reinvested until such time that you choose to hold on to the policy.
The aim is to get better returns in the long run with ULIPs. However, returns are not guaranteed since it is a market-linked product.
11. Should I surrender my ULIP?
You can surrender your ULIP post the five-year lock-in period. However, it may not be the smartest decision since a significant part of the premiums will be absorbed in covering fees and charges accrued over the first five years.
12. Can I stop my ULIP?
Yes, for any reason you wish to discontinue your ULIP, you can send a request for ‘withdrawal of policy’ to the insurer. However, you will only be able to receive the proceeds from the investment after completing the 5 year lock-in period.
13. Is LTCG tax applicable on ULIP gains?
There is no LTCG tax applicable on any ULIP gains.
ULIPs and ELSS are easily confused as interchangeable concepts but are completely different from each other. Unit-linked plans offer life cover, which is not the case with mutual funds. This is the biggest differentiator that helps investors choose ULIPs as the go-to investment instrument today. Take a look at everything you need to know about ULIP's to understand this investment and insurance instrument comprehensively.
14. What are the tax benefits of investing in ULIP?
The premium paid on a ULIP is eligible for a deduction up to a maximum of Rs 1.5 lakhs per year under section 80C of Income Tax Act. The amount received by the investor on maturity is exempted from tax under Section 10(10D).
