Guide to ULIPs: Unit-Linked Insurance Plans, Fees, and Benefits

Mini Balakrishnan

• September 7, 2024
• 9 min read
• Insurance

A select few categories get all the attention when people talk about investing to save money on taxes under Section 80C of the Income Tax Act. Among these are the Sukanya Samriddhi Yojana, the Employee Provident Fund (EPF), the Public Provident Fund (PPF), the National Pension System (NPS), and the Equity Linked Savings Schemes (ELSS). But, there is another option that, although less common nowadays, nonetheless offers tax advantages. The ULIP full form is “Unit-Linked Insurance Plan”.

High fees, minimal life insurance coverage, few investment options, and poor performance have contributed to ULIPs' declining popularity among modern investors.

A deeper understanding of ULIPs, however, may help you make an educated choice about whether or not to include them in your investment portfolio since there is always the chance that this view needs to be more accurate. In this post, we’ll define Unit Linked Insurance Plans (ULIPs) and then go into the nuts and bolts of these policies, covering topics like fees and returns.

What Are Unit-Linked Insurance Plans?

In short, insurance firms provide Unit Linked Insurance Plans (ULIPs) as a tax-advantaged financial instrument that combines investments with life insurance protection. Although combining insurance with investing seems promising, there are several drawbacks to be aware of in practice.

The life insurance payout, typically limited to 10 times the yearly premium, does not come for free, to begin with. Hence, not all of the premium paid is accessible for investment since a part is used to cover the cost of insurance. This may seem like a drawback compared to pure investing products like Mutual Funds, but the insurance component allows ULIPs to provide a tax advantage.

First, we’ll go through the Mortality Charges that come with ULIPs so you can get a feel for the product’s overall cost of ownership.

ULIPs’ Mortality Expenses

Earlier, we established that investments partly fund the Life Insurance element of a Unit Linked Insurance Plan’s premium. For ULIPs to provide the tax advantage to the policyholder, they must provide a level of life insurance that may need to be improved, particularly when compared to a term plan.

The life insurance coverage given by a ULIP, or Sum Assured, is typically 10 times the yearly premium but may be as minimal as Seven times the yearly premium. The Mortality Fee is part of your premium that goes toward the upkeep of your Life Insurance coverage.

Important determinants of this mortality rate are:

• Age of the policy owner
• Smoking Behavior
• Sum Guaranteed
• Gender
• Profession
• Destination
• Medical Records

The mortality costs were included in the insurer’s schedule of benefits that accompanied the quote:

As the plan continues, you can observe that the Mortality Charges drop every year. Let’s determine why this occurs.

The Mortality Charges algorithm is as follows:

(Life Cover – Investment Valuation) x Mortality Rate = Mortality Charges

Where,

Investment Worth = Premium Paid Plus Investment Growth

In the above scenario, the mortality charges computation would be as follows:

Mortality Fees for Year 1 are Rs. 1200 for a 10 Lakh policy. The actuarial table indicates a Mortality Rate of 0.12% for a male, age 36, who does not smoke, and this is the number used by the insurance to arrive at their estimate.

Since the insured person is now 37 years old, the Mortality Rate will rise to 0.13 percent in Year 2 of the policy. The value of an investment rises as a proportion of the principal. The mortality costs would be determined as follows, assuming a death rate of 0.13 percent and an investment value of 10.1 million rupees:

Even if the Mortality Rate rises over time, the mortality costs associated with a ULIP decrease with time as the value of your past investments grow at a quicker rate.

Mortality Costs of ULIPs get lowered to zero during 8-9 years of the policy term for subscribers who reach the age of 40 years, and the same calculations hold for covered persons of any age. Mortality Charges are one of the most well-known ULIP expenses, but we’ll cover additional potential outlays of cash in the next section.

Using a ULIP Calculator for Cost-Benefit Analysis and Future Returns

After learning the ins and outs of a ULIP plan, it’s important to do some careful cost-benefit analysis. A ULIP Calculator is useful for comparing and assessing different ULIP plans in India. A ULIP Calculator is a tool used to determine the sum due at the end of a ULIP policy based on the policy’s investment value and predicted returns in the future. Returns from a ULIP plan may be estimated with only a few pieces of information from the investor, including the investment amount (excluding GST), payment regularity, premium payment term, and investment duration. You may get your returns and your life insurance coverage using the calculator.

How Does The ULIP Calculator Work?

1. Investment Amount: Enter the total amount you plan to invest, excluding taxes like GST.
2. Premium Payment Frequency: Specify how often you’ll make payments (e.g., monthly, quarterly, yearly).
3. Premium Payment Term: Indicate how long you plan to continue paying premiums (e.g., 5 years, 10 years).
4. Policy Duration: Provide the total length of the policy, which includes both the premium payment term and the time your investments stay in the market.
5. Fund Type and Allocation: ULIPs offer multiple fund options, including equity, debt, or balanced funds. You can specify how you want to allocate your investments.
6. Expected Rate of Return: Enter the anticipated return rate based on the type of funds you’re investing in. Market-linked products have varying returns, depending on performance.

Once these details are provided, the calculator computes the following:

• Investment Growth: Estimates how your investment will grow over time based on the selected fund performance.
• Life Insurance Coverage: Shows the life cover included in the plan.
• Maturity Benefits: Projects the total returns and benefits you can expect at the end of the policy term.

Key Advantages of a ULIP Plan You Should Know

You may wonder, “What are the advantages of a ULIP plan?” Also known as ULIP, the Unit Linked Insurance Plans give investors an overview of the decline and growth of financial markets. Choosing multiple fund alternatives may tailor your ULIP plan investment to your risk tolerance and financial goals.

Learn more about “what is ULIP plan” and its benefits using a ULIP calculator to approximate the premium paid towards the plan and the projected returns. ULIPs also have these additional advantages:

1. Market-Related Returns

By investing a part of the premium in market-linked products like debt and equity instruments, a ULIP allows policyholders to earn returns according to the performance of the underlying markets (in varying proportions).

2. Life Insurance with Savings

Unit Linked Insurance Plans (ULIP extended form) provide financial security by assigning a part of the premium paid to market-linked products and covering unexpected medical expenses incurred by you and your loved ones.

As a result, the ULIP plan will take care of your safety concerns while you enjoy market-linked gains.

Now that you don’t have to worry as much about protecting yourself from the unexpected, you can focus on building your long-term financial security via consistent savings and investing with ULIP plans.

3. Accessibility

To put it in its complete form, the “Unit Linked Insurance Plan” (ULIP) is a financial product that gives you the freedom to

• Invest in different funds when your circumstances change.
• Withdraw a portion of your funds after the original 5-year lock-in term has ended.
• Additions to your regular premium (in the form of a single premium) allow you to invest more money whenever convenient.

4. Level Premium Payments

Every premium payment made under a ULIP plan, whether a regular premium or a premium for a certain period, must be the same. Any further premium payments to maintain life insurance coverage will be rolled into a single payment.

5. Equitable Sharing of Fees

To prevent insurers from incurring astronomical costs upfront, IRDAI recommends that they spread out the fees associated with ULIPs over the plan’s whole five-year lock-in term. When putting your money into a ULIP plan, you should know exactly what fees and costs you’ll be responsible for paying.

6. Tax Advantages

There are multiple ULIP tax benefits. Under Section 80C of income tax 1961, you may write off up to Rs. 1.5 lakh of your ULIP payment as a tax deduction. Another ULIP tax benefit is that under Section 10(10D) of the Income Tax Act 1961, the ULIP plan’s maturity/death benefit is not subject to taxation.

How to Select the Right ULIP Plan

Now that you know what a ULIP plan is, you may choose the best insurance from among the many alternatives. The greatest ULIP plan in India may be found by researching, comparing, and evaluating before investing. If you want to choose the right ULIP plan, consider the following.

• Assess Your Goals
• Choose the Appropriate Life Insurance Coverage Amount
• Invest for a Protracted Investment Duration
• Get Maximum Tax Advantages u/s 80C & 10 (10D)

Who Makes the Ideal ULIP Investor?

If you’re considering whether or not you should become a ULIP investor, here are some factors that make the idea ULIP investor that you could consider:

1. People who want to constantly monitor their assets

If you have a ULIP, you can keep tabs on your investments as closely as you choose. The ability to choose between funds with different risk-reward profiles is another perk of ULIP plans that may be useful to these people. With a ULIP, you can make more informed choices about your investments and insurance coverage.

2. People with a Moderate to Long-Term Investment

If you expect to keep your money invested for the foreseeable future, a ULIP plan may be the best option.

3. Participants with Diverse Risk Profiles

Fund choices in ULIP plans might vary in terms of risk and potential reward. Hence, before investing in a ULIP plan, investors with varying risk profiles (from those with a low-risk tolerance to those with a high-risk appetite) should learn about the types of funds that are accessible.

4. Investors from All Phases Of life

You may protect yourself and your loved ones from unexpected expenses and legal obligations with several ULIP policies.

Conclusion

Now that you understand how ULIPs function, you can make a more educated choice about this investment. Keeping your money in the market for a longer period is preferable. In the long run, losses caused by fluctuations in the market are made up for. Your premiums will be invested at a growing rate over time, allowing you to realize your full potential.