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Unit linked insurance plan is a mix of investment and insurance cover. The financial goal is to offer wealth creation and life insurance cover through investing a portion of the premium in an insurance plan and the other portion by investing in a mutual fund.

ULIP vs ELSS

What is Unit Linked Insurance Plan?

ULIP stands for unit-linked insurance product which offers a combination of both insurance and investment. A policyholder makes the premium payment either monthly or annually. Hence the policyholder pays a regular premium or an annual premium towards ULIPS unit linked insurance plans.

A portion of the premium goes towards life insurance, and the balance amount is invested just like a mutual fund. There are four types of ULIP plans namely, equity funds, debt funds, liquidity funds, and balanced funds.

How do ULIPs work?

The investors pay a premium towards ULIP Plan, which is pooled together and after deducting the expenses, the balance investment is invested in the type of funds i.e equity-oriented mutual fund, debt-oriented mutual fund or balanced fund and hybrid mutual fund. The investors are then allocated the ULIP units in the proportion of the money invested.

The various charges deducted by the term insurance providers are mortality charges, fund management fees, administration charges, surrender charges etc. 

Let’s understand this with the help of an example:

An investor invests in Aegon Life ULIP’s with an annual premium of Rs. 1,00,000 for a period of 15 years. Below will the units allotted to you:

Initial sum assured –   Rs 10,00,000 (yearly premium*10)

Policy administration & other charges – Rs. 1000 per month =  Rs. 12000 per year

Total annual investment – Rs. (1,00,000 – 12000) = Rs. 88,000

Net asset value (ULIP NAV) – assume Rs. 100

Number of units allotted will be (Rs 88,000/100) =  880

Types of charges

There are various types of charges attached to ULIP Plan. Below are some of the charges which investors should be aware of:

Premium allocation charges

The premium allocation charges are levied on the premium paid by the investors. Before the policy is issued by the company, there are certain charges that they have to incur like underwriting costs, legal fees etc. However, there are some recent plans which come with zero premium allocation charges as well.

Administration charges

These are the charges which are recovered towards the maintenance of the insurance policy by the issuing company.

Surrender charges

These are levied in case of any premature encashment of the units and is charged on a percentage basis of the premium payment made.

Mortality charges

It depends on a number of factors including the entry age of the investor, the sum assured and is a charge towards the insurance coverage provided under the plan.

Partial withdrawal charges

Some funds allow you to make a partial withdrawal from the fund which can be either unlimited or either restricted to a certain number. This charge is levied on such withdrawal.

Fund management charges

These are levied by the insurance company for the management of various funds and are deducted before arriving at the ULIP NAV (net asset value). It also varies on the type of the fund wherein equity-oriented mutual funds are charged at a higher rate as compared to debt-oriented mutual funds.

Limitation of investing in ULIP

While the ulip unit linked insurance plan provides two-fold benefits, there are certain limitations as well which makes it a tough choice for investors to invest in.

A part of the investment is invested in either equity-oriented mutual fund, debt-oriented mutual fund or balanced fund and hybrid mutual fund. The ULIP might invest the entire pool of investment in an equity fund, which in turn will invest in shares and securities of companies. 

The returns of ULIPs are market linked. The fund value depends on the current market conditions. There is a probability that those stocks that do not perform well might lead to lower returns. Further, there are various charges associated with the scheme that will lead to overall lower returns.

Features and benefits of ULIPs

Liquidity 

ULIP is considered as a fairly liquid investment product. It allows the investor to make partial withdrawals in case of unpredictable emergencies. This, of course, comes with an additional charge which the investor needs to bear

Life Cover

ULIPS unit linked insurance plans provide a life cover combined with investment. It provides security to the investor and his family during emergencies like the untimely death of the investor

Tax savings

The premium paid on ulip unit linked insurance plan is eligible for deduction under section 80C of the income tax act up to a maximum of 1.5 lakhs during a financial year. The maturity benefit is exempt from tax. However, it has to fall within the criteria specified in section 10(10D) of the Income Tax Act,1961

Investment portfolio switch

The insurance company allows an investor to switch the investment portfolio between an equity-oriented mutual fund and a debt-oriented mutual fund. An insurance company allows very few switches free of cost.

Comparision between ULIP & ELSS

ParticularsULIP’sELSS
PurposeThese are used as a method to cover both insurance and investment purpose.Primarily used only for investment purposes as it does not allow any insurance
Lock-in periodULIP’s have a mandatory lock-in of 5 years.ELSS has a mandatory lock-in of 3 years.
Applicable chargesThere are multiple charges like surrender charges, administration charges, fund switching charges, mortality charges which are higher in the first year.Fund management charges and other charges, if any, are clearly specified and hence it’s easier to understand.
Tax Benefits under the income tax actDeduction under section 80-C is allowed for the investments made although the gains realized are fully taxable if not falling under the condition of section 10(10D)Long-term capital gain on sale of such ELSS is taxable @10%. However, only the gains above 1 lac are taxable.
Risk factorThese are considered less risky as compared to ELSS depending on the investment in various classes.These are riskier than ULIP but have been consistent performers in the long run.
Published on February 4, 2020