ULIPS is an acronym for unit-linked insurance plans. Insurance products can be pure insurance products or include an investment component. Life insurance products can be linked with an investment plan. Health insurance products can also be linked with investment plans. Linked health insurance plans are better known as ULIP Plans. The investment component of linked primary plans is invested in the capital market instruments. The invested component of life insurance or health insurance plans comprises of units of capital market instruments including equity and debt instruments. ULIP can also be total plans which provide investment benefits as well as life and health cover packed into one product.
ULIPS and pure insurance plans
One may think that ULIPS are a combination of primary insurance product and a mutual fund product. Investors often choose to compare unit-linked insurance plans with pure life or pure health insurance on one hand and mutual fund performance on the other hand. Policy bazaar portal provides investors comparison tools at the tip of their fingers. Just select from the list of fund and category and get the product performance and details. It’s that simple.When compared to other investment options unit-linked plans besides providing life insurance also provide interesting returns. At present unit-linked plans are offering around 9% returns. The invested component of ULIPS function much like mutual funds and the returns are comparable.
Life insurance products can be pure life insurance. The premium of pure life insurance products is entirely used for providing life cover. Pure life insurance provides support to family members in the event of the demise of the policyholder. Pure life insurance products do not have provisions for survival or maturity benefit. Log on to policy bazaar portal to know features and benefits of pure life insurance products. Nominal premiums of Rs 500 per month for pure life cover products can fetch life cover up to one crore.
Comparison of unit-linked and pure life insurance products
The policy bazaar portal provides a comparison between unit-linked and pure life insurance products concerning the main differential features which are discussed as for mentioned.
Life cover: ULIPS provide life cover as well as growth in investment. Pure insurance products only provide life cover. A component of the premium amount is fed into investment instruments for unit-linked plans. In pure insurance plan, the entire premium is used for providing life cover. Pure life cover products are preferred by individuals who seek the security of family members in their absence. Unit-linked products are preferred as a single shot solution for life cover and investment needs.
Health cover: Total ULIPS provide life cover, health cover as well as opportunity to invest in market instruments and realize capital growth. Under health cover, the policyholder can cover self as well as family members against unprecedented health problems. Health cover includes hospital expenses cover and recuperation cover up to the stipulated amounts. Pure life insurance products do not provide health cover; death benefit cover is only available to family members in the event of the demise of the policyholder.
Eligibility: Minor family members can be included in the ULIPS plan for investment and health insurance benefits. Gains from ULIPS can be used towards minor education and marriage. Minors, however, won’t qualify for the life insurance component. Only the policy holder’s life and life of adult family members like spouse can be insured.
Survival benefits: Pure insurance plans do not have any survival benefits. That is if the policyholder survives the tenure of pure insurance plan, s/he or family members are not entitled to receive any survival benefits. ULIPS, however, provide survival benefits to the policyholder upon completion of policy tenure.
Maturity benefits: Unit linked insurance offer maturity benefits to policyholder or beneficiaries. If the policyholder does not survive the policy tenure of ULIP policy, then beneficiaries are entitled to receive a death sum assured amount for life insured and maturity benefits. If policyholder survives ULIPS tenure then s/he is entitled to receive maturity benefits inclusive of survival benefits. Pure life insurance plans, however, do not provide any maturity benefits.
Product charges: Pure life insurance products are simple and require minimal administration. Unit-linked plans are comprehensive financial and life plan packages and involve intricate administration. Asset management companies can charge Rs 1500 to Rs 6000 per year for ULIPS fund administration, depending upon the type of ULIPS.
The charges for ULIPS products include the following:
Allocation charges: this charge is deducted from the premium during the early years. The charge is levied for costs associated with underwriting, medical expenses, and other initial costs.
Administration charges: can be fixed or a percentage of the premium. Administration charges are deducted for maintenance of life insurance cover
Policy surrender charges: ULIPS policies have a surrender value. That is entire policy or units of policy can be surrendered before maturity after the policy gains surrender value. A certain percentage is deducted as the surrender value for premature withdrawal
Mortality charges: these are charges for the risk of demise. Mortality charges are based on increasing age of policyholder and accumulating fund value.
Fund management charges: fund management charges are charges associated with managing the investment portfolio, much like mutual fund management charges.
Fund switch charges: ULIPS offer some fund switching options to policyholders who can be 2 or 4 times or even be unlimited. Policyholders may change their preference for ULIP fund type. ULIP offers the flexibility of changing investment preferences.
Premature closure charges: premature charges are charges for closing the policy before the completion of the lock-in period. A small amount is charged for premature closure as prescribed by the IRDA.
Investment Growth: The investment growth feature of unit-linked plans is much like mutual fund plans. By the end of the tenure, the inverted component of the premiums can grow by 9 % or above under top ULIPS schemes. Pure life insurance products do not have any invested component and do not provide any investment growth.
Tax treatment: Pure life insurance schemes are eligible for tax deduction under section 80 C. ULIPS are eligible for tax benefits under section 80 C, 80 D and 10 D of the income tax act. Section 80 C allows a maximum deduction of Rs 1.5 lakhs. Section 80 D allows up to Rs 60 K tax deduction. Section 10 D exempts tax on incomes earned from certain types of ULIPS.
Product varieties: unit-linked plans offer several products with different features based on different investment preferences and risk flavors. The invested component of ULIP policy can comprise of equity, debt or balanced capital market instruments like that of mutual funds. Sole life cover policies are simple and have less scope for product variation. Life insurance companies may offer riders or additional benefits like premium payback feature under pure life insurance plans.
Product flexibility: ULIPS offer flexibility options like fund switching and change of investment plan. Flexibility is not a concern with pure life insurance plans.
Life insurance and unit-linked plans FAQs
Q. Do ULIPS and Life insurance have a lock-in period?
A. ULIPS have a lock-in five years. The policyholder may withdraw amount partially or wholly after completion of the lock-in period. There is no concept of lock-in period for pure life insurance product. The policyholder may choose to take up life insurance for minimum five years and pay a premium every year. The life insurance policy lapses if the premium is not paid within due time or by the end of the grace period.
Q. What are the top performing ULIPS for this year?
A. Aegon life I maximize secure plan, Bajaj Allianz future gain, SBI life wealth assure HDFC life pro-growth plus, Max life fast-track growth fund.
Q. What is type I ULIP PLAN?
A. Type I ULIP has provisions for death benefit payment, the value of which is higher of sum assured or fund value. In other words, if the sum assured is higher than the fund value at the time of death, then the beneficiary will receive sum assured amount. If at the time of demise the fund value is greater than the sum assured value then the beneficiary will receive fund value as death benefit. Type I ULIP has decreasing mortality charge feature which implies that mortality charge decreases with every passing year as sum at risk decreases.
Q. What is a Type II ULIP plan?
A. Type II ULIP plan offers death benefit equal to sum assured plus the fund value. The premiums of type II ULIPS are higher than premiums of type I ULIP plans.
Q. What is fund value and sum at risk of ULIP plan?
A. Fund value is the accrued value of the inverted component of the ULIP policy. The sum at risk is the difference between the sum assured and the accrued fund value. In other words sum at risk is the risk which the insurer carries of the untimely death of the policyholder.