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Unit-Linked Insurance Plans (ULIPs)​

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Unit-Linked Insurance Plans in India

What is Unit-Linked Insurance Plans ?

Definition:

Unit-Linked Insurance Plans (ULIPs) are a type of life insurance policy that combines investment and insurance. A portion of the premium is used for life coverage, while the rest is invested in market-linked funds as per the policyholder’s choice.

Purpose: 

ULIPs offer financial protection along with wealth creation opportunities, ensuring policyholders can achieve long-term financial goals while securing their family’s future.

Benefits:

  • Dual benefit of investment and insurance
  • Flexibility to choose investment funds
  • Tax benefits under Section 80C and 10(10D)
  • Partial withdrawal option after the lock-in period
  • Market-linked returns for wealth accumulation

Unit-Linked Insurance Plans (ULIPs)

Amidst the volatility in the current economy, one of the most compelling factors that have driven Indian people to consider Unit-Linked Insurance Plans (ULIPs), is the fact that everyone has the creeping fear of dying and having nothing to leave behind in the coffers for their family. 

 

With the 2008 Global Financial Crisis and more recent market volatility based on concerns over geopolitical events, having financial products with a guarantee of protection alongside potential for growth has proven indispensable. As per the statistics of the Insurance Regulatory and Development Authority of India, ULIPs currently have around 10-15% share of the Indian life insurance market. Thus, it clearly suggests that this product continues to attract more and more investors.

 

The merits of this product include life cover and market-related returns as provided by ULIPs. The product can efficiently permit switching over equity-debt or balanced funds depending upon the comfort level of the investor and his readiness to undertake risk. Statistics reveal that during 2022, as much as nearly 25% of fresh policy seekers opted for ULIPs as an apt combination with unpredictable financial circumstances in their backdrop. The last decade has presented a good CAGR at around 10-12% for the ULIP-linked funds, which over the long term appear sustainable.

 

Yet because investments in ULIPs are market-linked, erratic returns seem not to subdue. For example, in 2018, after the market correction, the ULIP funds went down by 6-8%, but most of these bounced back in the average returns of 12-14% within the subsequent recovery period of that correction. Information below shall help you come to a decision on if your financial plan can embrace ULIPs.

What is a Unit-Linked Insurance Plan (ULIP)?

A ULIP is a life insurance policy where a portion of your premiums is invested in market-linked funds, such as equity or debt, or a mix of both. This gives you the dual benefit of long-term wealth creation and life insurance protection. 

According to IRDAI, ULIPs contributed ₹1.25 lakh crore in premium collections during FY 2022-23, signaling their growing prominence in India.

Here’s how ULIPs work:

  • Life Insurance: A portion of your premium ensures financial security for your loved ones in case of any eventuality.

  • Investment: The remaining part is invested in market-linked funds, which can be switched as per your investment preferences.

Why ULIPs Are Gaining Popularity in India

ULIPs have become a preferred financial product for many Indians because they combine life insurance with investment opportunities. 

The ULIP market in India has grown at a compounded annual growth rate (CAGR) of 12% in recent years. Here are some reasons for their increasing popularity:

  1. Investment Flexibility: ULIPs allow you to switch between equity and debt funds based on market conditions. In FY 2022-23, over 20% of ULIP investors switched their funds at least once, leveraging this feature to optimize returns.
  2. Tax Benefits: Under Section 80C of the Income Tax Act, you can claim deductions of up to ₹1.5 lakh per year on premiums paid. Additionally, under Section 10(10D), the maturity proceeds are tax-free, provided your annual premium does not exceed 10% of the sum assured.
  3. Wealth Creation: Over the long term, ULIPs can generate considerable wealth. Historical data shows ULIP equity funds have delivered average annual returns of 8-12% over 10 years, outperforming traditional savings options like fixed deposits.
  4. Transparency: Insurers must now provide regular updates on fund performance. A recent survey showed that 85% of ULIP holders appreciated the transparency offered by real-time fund tracking features.

How ULIPs Work: Breaking Down the Plan

A typical ULIP divides your premium into two parts:

  • Insurance Component: Around 10-20% of your premium provides life insurance. Upon the policyholder’s death, the beneficiary receives either the sum assured or the fund value, whichever is higher.
  • Investment Component: The remaining 80-90% is invested in market-linked funds, such as equity or debt. During FY 2022-23, 60% of ULIP investments were in equity funds.

Charges in ULIPs

When you invest in ULIPs, several charges apply, including:

  • Premium Allocation Charge: Ranges between 2-5% of the premium, especially in the initial years.
  • Fund Management Charges: Capped at 1.35% of the fund value annually, as per IRDAI guidelines.
  • Mortality Charges: These charges provide life insurance and vary depending on your age.

Key Benefits of ULIPs

  1. Dual Advantage of Investment and Insurance: ULIPs offer life insurance while giving the potential for wealth creation. In a 2023 KPMG survey, 75% of ULIP holders cited the dual benefit as the primary reason for choosing ULIPs over traditional life insurance policies.
  2. Tax Efficiency: ULIPs offer tax benefits under Sections 80C and 10(10D). For instance, investing ₹1.5 lakh annually can save you up to ₹46,800 in taxes (for a 30% tax bracket). Additionally, no long-term capital gains (LTCG) tax applies to ULIP returns, making them more attractive than mutual funds.
  3. Fund Management Flexibility: You can switch between funds to adapt to market volatility. In FY 2022-23, fund switches increased by 30%, showing that investors are actively managing their portfolios.
  4. Partial Withdrawals: ULIPs allow partial withdrawals after a 5-year lock-in period. In 2022, around 25% of ULIP holders opted for partial withdrawals for emergencies such as medical expenses or home purchases.
  5. Long-Term Wealth Creation: ULIPs perform best over long durations. The 10-year average return on ULIP equity funds has been 10-12%, while debt funds have returned 6-8%. This makes ULIPs ideal for long-term goals.

Types of Funds Available in ULIPs

  • Equity Funds: High-risk, high-return funds invested in stocks. In FY 2022-23, equity funds in ULIPs delivered an average return of 12%.
  • Debt Funds: Conservative investments in bonds and government securities. Debt funds have given steady returns of around 6-7% over the last five years.
  • Balanced Funds: A mix of equity and debt, offering moderate risk and return. In FY 2022-23, balanced funds provided an average return of 9%.

Risks Involved with ULIPs

While ULIPs offer multiple benefits, they come with certain risks:

  • Market Risk: ULIP investments are market-linked, meaning returns fluctuate based on market performance. For example, during the COVID-19 pandemic in 2020, many ULIP equity funds fell by 15-20% before recovering.
  • Surrender Charges: Surrendering a ULIP before the 5-year lock-in period ends can result in surrender charges of 1-5% of the premium.
  • Mortality Charges: As you age, mortality charges increase, which can lower your overall investment returns.

How to Choose the Right ULIP for You

Consider these factors when selecting a ULIP:

  1. Investment Goals: Define your goals—whether it’s for retirement, your child’s education, or buying a home. For long-term wealth creation, choose equity-heavy ULIPs.
  2. Risk Appetite: For higher returns, invest more in equity funds. If you prefer stability, allocate more to debt funds.
  3. Charges: Compare charges like fund management and mortality fees, as these affect your returns over time.
  4. Fund Performance: Review the historical performance of ULIP funds. A fund with consistent returns of 8-10% over five years is considered reliable.

FAQs About ULIPs

  • What is the lock-in period for ULIPs?
    The lock-in period is five years. After that, partial withdrawals are allowed.
  • Can I switch between funds in a ULIP?
    Yes, you can switch between equity, debt, and balanced funds, with insurers offering 4-12 free switches per year.
  • Are ULIPs suitable for short-term goals?
    No, ULIPs are best suited for long-term investments.
  • How are ULIPs taxed?
    ULIPs offer tax deductions under Section 80C, and maturity proceeds are tax-free under Section 10(10D).
  • Is there any risk involved with ULIPs?
    Yes, ULIP investments are market-linked, and market volatility affects their returns.