What are ULIPs
There have been many discussions about ULIPs for the past few years, which you may have noticed. This is a hybrid product that combines life insurance and investment. Like any other life insurance product, it involves investment and insurance.However, the decision to select an investment from available fund options is left to the policy holder so that the risk of investment is put on the policyholder. Such policies can prove to be more profitable than conventional insurance policies, but there is a greater risk to it.
A few days back my friend called me and asked about suggestions for ULIPs as one of the Top Private Sector bank's Relationship Manager was chasing him for selling a ULIP policy.
You must read the article, as i am a banker and that too working in one of the top most Private Sector Banks in India. This will include in and out of ULIPs, are the good or not for investments etc.
Stick with me to know what i suggested my friend, but before that let's just have some basic knowledge about the much pitched product by banks to its customers.
What are ULIPs ?
A unit linked insurance plan is a product where insurance and investment benefits are integrated into one. These are offered by insurance companies and it was first launched by the Unit Trust of India (UTI). These are mainly available in India.How does the ULIPs work ?
ULIP is a combination of insurance and investment. When you pay a premium, one part of it is used by the insurance company to provide you insurance coverage and the rest are used to invest in debt and equity securities.
How are ULIPs, similar to a mutual funds ?
Like a mutual fund, premiums are deposited simultaneously to invest in proportion and you can personalize your investment on the basis of your investment needs and get the benefit of the risks. Your ULIP will keep a fixed number of funds, which holds the NAV (Net Asset Value) declared on a daily basis. The value of each unit of a fund calculates by dividing the total value of the fund's investment by the total number of total units. The rate of return is determined by NAV.How are insurance policies similar to ULIPs ?
In this you will receive life coverage like life insurance policy. You have to pay premium to the insurance company. The premiums are different depending on the plan you take. The lump sum amount (single premium) can be initially invested or you can opt for periodic payments with annual, semi-annual or monthly premiums.
Premium Plan
You can pay lump sum in the form of premium alone or you can opt for periodic payments based on your plan for a fixed period of years.Risks in ULIPs
As you hear or read in every insurance company's advertising, "They are subject to market risks. Please read policy documents carefully before investing." Ensure that you read and understand the ULIP's statement before buying it. Your return from your United Linked Insurance plan is directly related to market performance and you can face full risk as a policy holder in the future.Charges on ULIPs:
The charges applicable on the ULIPs will be applicable to the insurance company, administration fees, fund management charges, switch charges, surrender charges, mortality, premium allocation charges, partial withdrawal charges etc. These are different depending on your insurance company policies.
Death Benefit:
The return on the death of the policyholder will be completely tax free. Maturity: The gain received on maturity is tax free under 10D. 
Partial Withdrawal:
If the refund is not greater than 20% of the fund value of the policy and the lock-in period is created after the expiry, then it is tax-free.Premium:
You can claim a tax rebate on premium paid on ULIPs, which have been invested in equity, debt or money market instruments under Section 80C. For the present and the coming year, the limit of Section 80C is 1.5 lakhs.
Tax Benefit:
In the later phase, additional premiums offered in the scheme are tax-exempt under section 80C and 10D, if it is not more than 10% of the sum insured.Capital protection:
Sum Assured is guaranteed under the life insurance policy until the premium is paid on the policy and the policy is in progress.Protection against inflation:
Life insurance does not protect against inflation, because insurance has a fixed cover, a fixed duration in which the sum assured is also fixed. However, in the equity fund option, there is an opportunity to create wealth in the long run, keeping inflation behind. But there is no guarantee that higher returns will be available than inflation.Guarantee:
The sum assured (sum assured) is guaranteed and the premium is fixed during the policy term. There are also some profitable policies with a minimum compensation guarantee, which vary according to the insurance companies and the policy.Liquidity:
ULIPs have a lock-in period of five years and after 10 years of change in the budget, technically it has reached 10 years. Selling a unit that has been invested in a premium can get liquidity. The investor can surrender the policy in an unfinished case or surrender the policy due to loss.Option to exit:
The policy can be surrendered or closed due to financial loss. Terms and Conditions apply.Other risks:
There is a risk of decreasing premiums after you purchase a policy. There is also a risk of premium rising. Apart from this, new risks that may well meet your financial needs are also at risk.
Benefits of ULIPs:
Market-Linked: Since ULIPs are invested in funds, market-linked instruments, so if the market is in your favor then you get an opportunity to get extraordinary returns.Life Insurance: Its insurance policy also provides life cover coverage, with many features.
Long Term Savings: ULIPs are usually extended for a period of 5 years or more. Just like an insurance plan, long-term commitment is required to pay premium, for which the policy will be well paid when mature.
Flexibility: ULIP gives you the option to switch between different investment plans, according to your needs.
Tax free: Profit from ULIP is tax free under Section 80C and 10D.
Hindrance in ULIPs:
Charges: These amounts to 11-12 % of total premium paid.
Dependence on Market: If markets are down at the end of your maturity period, you can imagine the loss.
Limited choice of funds to invest in: If you are considering a particular company than you will have to invest in there funds only.
So this brings us to the final part,
I suggested my friend not to invest in ULIPs, main reason being the charges, for eg. a premium of Rs. 1,00,000 p.a. would fetch Rs. 11,000 to Rs.12,000 in charges only, if that gets invested in a Mutual Fund, you can expect a return of at least 8%.
See you next time.
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