Online ULIPs are cost-efficient and flexible

Unit Linked Insurance Plans (ULIPs) are a category of goal-based financial solutions that offer dual benefits of investment and protection. A Unit linked Insurance Plan is linked to the capital market and offers the flexibility to invest the units in equity or debt funds depending upon the customer’s risk appetite and acts as a good corpus builder due to low charges.

In the past, ULIPs suffered from certain limitations like high charges. Things changed for better in 2010, when the Insurance Regulatory and Development Authority (IRDA) issued new guidelines for ULIPs in order to improve the returns for investors by reducing charges and to ensure that the new product is sold and bought as a long-term protection and savings tool.

With the economy looking to get back on track, any medium to long-term investor should give serious consideration to investing in equities.

ULIPs, especially online ULIPs, are one of the investment vehicles that offer a convenient way to participate in equity market returns over medium to long term, whilst also providing insurance cover during the term. Life insurance companies have leveraged the power of Internet and have introduced online ULIPs that are very easy to buy and extremely cost efficient.

Benefits online ULIPs

Cost-efficient: ULIPs usually have three broad kinds of charges. These are premium allocation charge, expenses towards fund management and policy administration, and policy discontinuance charge.

There are online ULIPs in the market with no charges for premium allocation, policy administration and discontinuance except 1.35 per cent of fund management charge per annum and mortality charge from the fund value of customer in order to provide the life cover. This makes them comparable or even lower in terms of cost than equity mutual funds.

In online ULIPs, no premium allocation charge means 100 per cent of premium is invested to buy units for the customer. As the general principal goes, more the units, more is the fund value.

No discontinuance charge means no penalty on exit from the plan. In the long term, these savings give good returns on investment in terms of fund value. Customers can even invest in ULIPs for short term, the minimum tenure being the five-year lock-in period.

ULIPs also levy a mortality charge from the fund value of customer in order to provide the life/insurance cover.

The mortality charges are reduced as your fund grows in value. For instance, if one pays Rs 2 lakh as annual premium and opts for Rs 20 lakh life cover/sum assured, in the first year, after one pays the premium, the company charges the mortality fee on the balance cover size of Rs 18 lakh. As the policyholder keeps paying the premium, the difference between the cover size and the fund value reduces, and the mortality charges come down.

Flexible: Online ULIPs offer multiple fund options ranging from 100 per cent-0 per cent exposure to equity in a single plan. This means that customers have the flexibility to choose among these investment funds (debt or equity) as per their risk appetite at a single time.

Insurers offer couple of few free switches and premium redirection in each policy year and charges a nominal fee if customer exceeds the set number of free switches. The free annual switches allow customers to shift from debt to equity at ease, and vice versa, and help optimise returns. Customers also have the flexibility to opt for partial withdrawals during policy term.

Tax-friendly: ULIPs come under Exempt – Exempt – Exempt (EEE) taxation regime, i.e. all three, the premiums paid, the earnings from fund and the fund value at maturity, are tax free.

These tax benefits effectively increases your return on investment. Premiums paid by a customer are eligible for tax benefits under Section 80C/Section 10(10) D of the Income Tax Act, 1961, subject to the conditions/limits specified therein.

Additional benefit of life cover: Apart from all the benefits mentioned above, online ULIPs also provide a life cover. This means in case of unfortunate demise of the customer during the policy term, a minimum lump sum benefit will be payable to the nominee of customer.

For example assume a customer invested Rs 1 lakh in an online ULIP with a Sum Assured of Rs 10 lakh. If today the fund value is Rs 5 lakh, and unfortunately the customer dies, the nominee would get Rs 10 lakh as lump sum amount.

(The author is Senior Executive Vice-President, Marketing, Product, Digital & e-Commerce, HDFC Life)