Unit Linked Insurance Plans (ULIPs) have often received flak from experts in the financial planning space and rightly so. The general arguments against them are they mix insurance and investment, the products are very heavy on commissions, etc. However, there are a select number of insurance products introduced in the last few years that attempt at addressing each of these issues and remain relevant for the retail investor.
Now ULIP is a type of an investment plan offered by insurance companies that combines insurance and investment in a professionally managed fund into one product. There are ULIPs in the market that are cost-inefficient due to front loaded agent commissions.
Zero commission, minimal charges
ULIPs have been known to be forever loathed for the high charges and commissions in the product structure. While the offline avatar still does have charges, the new generation of online ULIP products have either reduced them to minimal or completely removed all charges except of course charges for the insurance cover (called mortality charges – explained in detail further in the article) and fund management charges (1.35 percent against 2 percent in mutual funds).
Instant rebalancing
ULIP by its construct itself allows you to spread your fund into multiple funds based on your risk appetite within the same product. This also allows you to instantly balance your portfolio in case of life-stage or market triggers through the instant switching option. This is a benefit where it has an advantage over mutual funds. In mutual funds, you need to sell units in one fund and wait for settlement in your account, maybe attract exit load and taxation before you are able to rebalance your portfolio into another fund.
Transparent investment with flexibility
Like mutual funds, online ULIPs are now a transparent investment tool. The premium received under the policy, charges deducted, the current value of the investment through NAV disclosures—every information is available easily and readily to the investor. A detailed account of each and every rupee spent and earned from the investment is provided by the insurer.
Comparable fund performance
Earlier, a comparison between performance of the ULIP and corresponding mutual fund was not objectively possible, primarily on account of ULIP returns not factoring the front-loaded commissions and other charges it had in the plan.
Since, online ULIPs do not have these charges, the fund performance is now fairly comparable. Funds under ULIPs are rated and benchmarked by leading rating agencies in the country.
Waiver of premium
At a certain extra charge (around 0.40 percent to 0.60 percent on the annual investment), ULIPs can provide protection on the investor’s investment instalments in case of death of the investor. For instance, if an investor has decided to invest Rs 1 lakh per year for 25 years, and passes away in the 8th year, the remaining 17 instalments will be invested by the insurance company ensuring that the goal that was set by the investor can still be met.
No long-term capital gain tax
In Budget 2018, the Finance Minister re-introduced long term capital gain tax on the sale of stocks and mutual funds. Returns earned under stocks and mutual funds are liable to pay 10 percent long term capital gain tax on profit above Rs 1 lakh. ULIPs have not been affected by this tax, giving a significant amount of tax saving to the investor. Investors can invest in equity funds through ULIPs and still enjoy tax-free returns.
Return of mortality charges
ULIP offers a life insurance cover. This cover usually is 7-10 times of the total annual premium that you pay. The insurer deducts the life insurance cover charges from the units that are accumulated. A term plan would otherwise be three times cheaper for the same life cover. Therefore, experts advise not to opt for a ULIP in case the buyer’s main motive is protection. The newer online plans see the introduction of a feature called Return of Mortality Charge, where you get back all the insurance charges deducted if you survive through your investment duration.
Additional allocation of units
Forget the times when investors used to get rude shocks when a large portion of their investment was shaved off for paying agent commissions. This is the age of cash-backs. There are investment plans now available that allocate 1 percent additional units against the premium you pay for the first five years.
So yes, the good news is, there are good customer-centric ULIPs now available that you can consider; the bad news, however, remains that there are advisor friendly ULIPs with high commissions too available in the offline market. So, it is important that while you are considering ULIPs you ensure that they have zero commissions and have a majority of the features mentioned here.
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