To build a successful cricket team, you need a good set of batsmen, bowlers, and all-rounders. Similarly, your finances need different investments. ULIPs are one such investment.
While it is generally advised to consider insurance and investments as separate options, ULIPs combine the two and are worth trying out. Here is a look at Unit-Linked Insurance Plans (ULIPs). They are plans that offer a protective component and an investment component. We also compare them to Mutual Funds.
Understanding ULIPs
ULIPs are well-designed financial instruments offering both, protection and return on investment. A part of the premium goes towards protection while the other part is invested in the stock market and in fixed-income securities. If you are seeking to purchase an insurance product and invest at the same time, you can fulfil both your goals by taking up a ULIP scheme.
There are many low-cost ULIP products available in the market.
Advantages of ULIPs
ULIPs allow you to determine the amount you want to invest, and the amount which stays as the protective component. What’s more, being an insurance product, ULIPs come with tax benefits as per Section 80C of the Income Tax Act.
ULIPs are flexible. They allow you to decide whether and how much to invest in equities and debt. For example, let’s say a 30-year-old investor has taken up a unit-linked insurance policy with a policy term of 30 years. If the investor is single with no liabilities, he can initially opt for a 100% equity route. After 5 years, when the investor has a child and family obligations he can reduce his equity offering by 20% by opting to move the investments to the debt market.
Additional Reading: Can A ULIP Help You Meet Your Long-Term Goals?
By allowing investors to shift between equity and the debt market, the ULIP plan ensures that the plan is in line with the investor’s risk appetite.
Investing in ULIPs online today could actually work well for you as they are cheap – the benefits of lower expenses are passed on to the customer. So, you could get benefits such as upfront premium allocation charges, 100% premium allocation or even zero policy admin charges.
The Drawback
The major drawback with ULIPs is that they come with a wide range of charges, especially in the first five years of the policy tenure. The allocation charges, policy admin charges, mortality charges and fund management charges together account for more than 10% of the total premium paid throughout the policy tenure. Only the remaining amount of money is invested. However, unlike earlier ULIPs, charges are now being regulated by the Insurance Regulatory and Development Authority of India (IRDAI). IRDAI has capped annualised charges of ULIPs at 2.25% for the first 10 years of holding.
Additional Reading: All You Need To Know About The Types Of ULIPs
Now, how are they different from Mutual Funds?
Understanding Mutual Funds
Mutual Funds are a standalone investment product, allowing you to invest in low-risk debt or high-risk equity markets as per your choice. You can choose to invest with a small monthly amount using an SIP instead of a high annual premium, like in case of ULIPs.
Advantages and Drawbacks of Mutual Funds
Mutual Funds offer only an investment component and have no protection component for any investment.
On the positive side, unlike ULIP plans which charge 12-15% toward fund allocation charges, Mutual Funds have very low charges. The maximum amount of charges for Mutual Fund investment range from 2% to 4% per year, including service charges.
Combining ULIPs and Mutual Funds
Just like a successful team needs sportsmen with different abilities, a perfect financial plan has room for both, ULIPs and Mutual Funds.
ULIPs have a high cost and only help in generating decent returns over the long term which could be eight or more years, but provide life cover. Mutual Funds, on the other hand, offer better returns but have no protective component.
Additional Reading: 5 Tips To Get The Best Returns From Mutual Funds
But remember, ULIPs come with a lock-in period of five years. If you are in a financial emergency, you cannot withdraw the invested money. Mutual Funds offer you the freedom to withdraw the money any time you wish.
However, Mutual Funds do not give you tax benefits unless you choose the Equity-Linked Savings Scheme (ELSS) which has a lock-in of three years. Also, Mutual Funds do not provide loyalty benefits. ULIPs give loyalty benefit such as a bonus or additional units if you have held the ULIP for a long time.
ULIPs v/s Mutual Funds
| ULIPs | Mutual Funds | |
| Purpose | Investment + Protection | Investment only |
| Lock-in period | 5 years | No lock-in (ELSS is an exception with a 3-year lock-in) |
| Loyalty benefit | Cumulative bonus, additional units as loyalty bonus | Nil |
| Taxation | Tax benefits on investments and tax exemption on benefits and withdrawal | Tax benefits only if you invest in ELSS |
Before choosing a ULIP, check if a Mutual Fund and a term plan will work out cheaper. If not, you can consider investing in ULIPs.