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ULIP-  Unit Linked Insurance Plans

Updated: Jan 31


What are ULIPs?

ULIPs, or Unit Linked Insurance Plans, represent a unique fusion of insurance and investment vehicles. In a ULIP, a fraction of the premium you pay serves to safeguard your life, while the bulk of your investment is directed towards the financial markets. Policyholders have the flexibility to pay premiums on a monthly or annual basis, adapting to their financial preferences and circumstances.

Features and Benefits of ULIPs

  • Dual Benefit of Insurance and Investment: ULIPs provide both life insurance coverage and investment opportunities within a single financial product. Policyholders can secure the financial future of their loved ones while also growing their wealth through investments.

  • Flexibility in Premium Payments: ULIPs offer flexibility in premium payments, allowing policyholders to choose the frequency of premium payments (monthly, quarterly, half-yearly, or annually) based on their convenience and financial circumstances.

  • Choice of Investment Funds: ULIPs offer a range of investment funds, including equity funds, debt funds, balanced funds, and hybrid funds. Policyholders can select the fund(s) that best match their risk appetite, investment objectives, and time horizon

  • Fund Switching Options: ULIPs provide the flexibility to switch between different investment funds based on changing market conditions, investment goals, and risk preferences. Policyholders can reallocate their funds to take advantage of growth opportunities or mitigate risks.

  • Partial Withdrawals: ULIPs allow policyholders to make partial withdrawals from their investment funds after the completion of the lock-in period, which is usually five years. This feature provides liquidity and financial flexibility in times of need.

  • Top-Up Premiums: Policyholders can make additional investments, known as top-up premiums, to boost their investment corpus and take advantage of market opportunities. Top-up premiums offer a convenient way to increase exposure to the financial markets.

  • Transparency and Disclosure: ULIPs are required to provide transparent disclosure of charges, expenses, and investment performance. Policyholders can access detailed information about the charges deducted from their premiums and the performance of their investment funds.

Types of ULIPs- Based on Kinds of Funds


Unit Linked Insurance Plans (ULIPs) offer investors a variety of options for investing their funds, catering to different risk appetites and investment goals. Here are the many types of ULIPs based on the kinds of funds they invest in:

  • Equity Funds: Equity-based ULIPs primarily invest in stocks or equities. They offer the potential for high returns over the long term but also come with higher volatility.

  • Debt Funds: Debt-based ULIPs invest in fixed-income securities such as government bonds, corporate bonds, and other debt instruments. They are generally lower risk compared to equity funds and provide more stable returns.

  • Balanced Funds: Balanced ULIPs invest in a mix of equities and debt instruments. They aim to provide a balance between growth and stability, making them suitable for investors seeking moderate risk exposure.

  • Money Market Funds: Money market ULIPs invest in short-term, highly liquid instruments such as treasury bills, commercial paper, and certificates of deposit. They offer lower returns but are considered safer investments.

  • Index Funds: Index ULIPs track specific market indices like the NSE Nifty or BSE Sensex. The performance of these ULIPs is linked to the movements of the chosen index, offering a passive investment approach.

  • Sector Funds: Sector-specific ULIPs focus on investing in specific sectors such as technology, healthcare, energy, etc. These ULIPs allow investors to capitalize on the growth potential of particular industries.

  • Guaranteed Funds: Guaranteed ULIPs assure investors of a minimum return on their investment, providing a level of security. However, the returns may be lower compared to non-guaranteed ULIPs.

  • Hybrid Funds: Hybrid ULIPs combine elements of equity, debt, and sometimes other asset classes. They provide diversification and flexibility, catering to investors with varying risk profiles and investment objectives.

Factors to consider while choosing ULIPs

When choosing ULIPs (Unit Linked Insurance Plans), there are several key factors to consider that differentiate them from regular insurance policies. Here are some of the key factors specific to ULIPs:

  • Investment Component: ULIPs offer an investment component where a portion of the premium is invested in various funds chosen by the policyholder. This allows policyholders to participate in the potential growth of the market.

  • Choice of Funds: ULIPs provide policyholders with the option to choose from various investment funds, such as equity funds, debt funds, or balanced funds. This allows investors to tailor their investment strategy based on their risk appetite and financial goals.

  • Market-Linked Returns: The returns on ULIPs are linked to the performance of the underlying investment funds. Unlike traditional insurance policies that offer fixed returns, ULIP returns are subject to market fluctuations.

  • Flexibility: ULIPs offer flexibility in terms of premium payments, fund switches, and partial withdrawals. Policyholders can adjust their investment strategy based on changing market conditions and financial goals.

  • Transparency in Charges: ULIPs are required to disclose all charges upfront, including premium allocation charges, fund management charges, policy administration charges, and mortality charges. This transparency helps policyholders understand the cost structure of the policy.

  • Risk and Return Profile: ULIPs offer varying risk and return profiles based on the type of funds chosen by the policyholder. Policyholders can opt for higher-risk equity funds for potentially higher returns or lower-risk debt funds for stability.

  • Tax BenefitsT: ULIPs offer tax benefits under the Income Tax Act, including tax deductions on premiums paid and tax-free maturity proceeds, subject to specified conditions. These tax benefits can enhance the overall returns of the investment.

  • Long-Term Perspective: ULIPs are designed as long-term investment vehicles, encouraging policyholders to stay invested for the long term to benefit from the power of compounding and market growth.

Tax Benefits for ULIPs

After the amendment of The Finance Act, 2021, ULIP plans no longer offer extensive tax exemptions. Here's how the tax benefits of ULIPs have evolved:

  • Post-Amendment Tax Treatment:

  • ULIP policies issued on or after February 1, 2021, are no longer entitled to tax exemptions as they were previously. However, policies issued before this date continue to enjoy tax benefits.

  • The amendments apply prospectively, meaning policies issued after February 1, 2022, are subject to the new tax regulations as below:

  • If the aggregate annual premium paid exceeds INR 2.5 lakh for any previous years, capital gains tax is applicable on any income earned from the ULIP at time of maturity else it remains to be exempt from income tax.

  • If the person has purchased multiple ULIP PLans and total premium of year is more than Rs 2.5 Lakhs than also it is taxable at time of maturity.

  • Only if the aggregate premium paid in a year is less than 2.5 Lakhs (in more or more polices combined) than it is exempt

  • Long-term capital gains (LTCG) tax of 10% is applicable on ULIP equity-oriented investments held for more than one year, while short-term capital gains (STCG) tax of 15% applies to investments held for one year or less.

  • Tax Exemptions:

  • Despite the changes, there are still tax benefits available for ULIPs.

  • There is no tax liability in the event of the policyholder's death.

  • Premiums, maturity proceeds, and death benefits are completely tax-free if the premium is within the INR 2.5 lakh cap.

  • ULIPs continue to enjoy tax exemptions on premiums paid up to INR 1.5 lakh u/s 80C

Despite the changes in tax regulations, ULIPs remain a viable investment option with certain tax benefits intact. It's essential to consider these factors alongside the investment and insurance aspects when evaluating ULIPs as part of your financial strategy.

Here are some of the best ULIP plans available in India


Below are Average Returns of Few To Performing ULIP Funds in India :


Returns vary on basis of type of fund you select . Generally equity funds come with high risk and righ return and inversely for debt funds with low return and low risk.


ULIP Funds

Returns

Returns

 

3 years

5 years

Aegon Life Assure Plus Debt Fund

7.00%

7.70%

Bajaj Allianz Life Equity Mid-Cap Pension Fund

16.13%

26.19%

Bajaj Allianz Life Group Stable Gain Fund

8.27%

11.61%

Bharti AXA Guarantee Builder Steady Money Fund

7.20%

8.10%

Birla Sun Life Individual Multiplier Fund

20.78%

26.55%

Canara HSBC Unit Linked Endowment Debt Fund

7.50%

8.10%

Edelweiss Tokio Life Managed Equity Fund

8.53%

12.54%

Exide Flexi life Plus Debt Fund

7.90%

8.60%

Exide One Life Debt Fund

7.90%

8.60%

HDFC Unit Linked Endowment Plus Secured Managed Fund

7.40%

8.10%

Kotak Superannuation Group Bond Fund

8.30%

8.70%

LIC Life Market Plus Secure Fund

10.22%

12.40%

TATA AIA Life Future Select Equity Fund

15.46%

22.44%

TATA AIA Life Super Select Equity Fund

15.29%

22.58%

TATA AIA Whole Life Mid-Cap Equity Fund

16.13%

26.85%



Prasanna Laxmi R., Assistant Content Manager

An MBA student specializing in Finance, driven by a keen interest in exploring the complexities of finance to navigate the business landscape.




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