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New Age ULIPs: How Have ULIPs Evolved?

New Age ULIPs: How Have ULIPs Evolved?

New Age ULIPs: How Have ULIPs Evolved?

The first ULIPs saw the light of the day about two decades ago in 2001. However, the product was aggressively popularized only since 2005, after private life insurers forayed into the product. Unit linked insurance plans always had great potential, but one simple drawback – awareness.

A Contemporary Investment Option

Except the operational factors ULIPs never asked for a significant change in investor behaviour towards an insurance plan. Before ULIPs life insurers have always been offering long-term investment plans with guaranteed returns coming 20-30 years later.

ULIPs are also long-term investments but provide far more flexibility when it comes to investment. However, the lack of awareness of the long-term benefits of ULIPs among the new investors put it in a bad light.

Another factor which contributed to the bad rapport for the investment was the initial charges of the plan. Although, the charges subsided to a nominal level after few years, the initial shock due to high expense ratio was enough to irk the investors.

Being a unique investment product, it was also difficult to find a direct comparison with any other investment option. However, with time a lot has changed with the ULIP plans.

Charges & Features of Old ULIPs

The older ULIP plans had multiple charges applied to each premium invested in the plan and to the accumulated corpus. Plus, there could be additional charges for various service requests like withdrawals and switches, depending on the plan. The common charges applicable to every ULIP plan:

  • Premium allocation charge

    This charge is applicable to each invested premium and ranged between 3-9% of the premium amount.

  • Policy administration charge

    Applied on the total corpus, this is usually less than 2% p.a. but may be capped at a specific amount.

  • Fund management charges (FMC)

    This charge is also applicable on the corpus; ranges between 1% to 1.35% for active policies depending on the type of fund)

  • Mortality charge

    Applied for the life cover amount (Sum at Risk), based on your age and other factors influencing the life insurance premium.

The mortality charges in a ULIP plan is not applicable based on the life cover sum assured of the plan. Instead, the charge will consider only the Sum at Risk value for the total cost. The sum at risk (SAR) is the difference between your accumulated corpus and higher of the following two numbers:

  • Policy sum assured
  • 105% of the total premiums paid

You can check your policy document for the details of SAR calculation, as it may vary depending on the benefit options and policy features.

ULIP plans have always been goal-oriented investment plans. If you have a long-term goal, ULIP would be your one-stop investment plan to secure it. The earliest features of ULIP plans included:

  • Life cover for the policyholder
  • Goal protection option under child plans
  • Option to switch between different funds
  • Option to withdraw funds from the plan partially after the lock-in period

Charges & Features of Modern ULIP Plans

Modern ULIPs are not only flexible with investments, they offer more features and benefits at a lower expense. The expenses in the new ULIP plan Invest 4G from Canara HSBC OBC Life Insurance:

  • Premium Allocation Charge: Nil
  • Policy Administration Charge: Nil
  • Fund Management Charge: Ranging from 0.8% to 1.35% depending on the type of unit-linked fund selected for investment
  • Mortality charge: As per the age of the policyholder and the SAR
  • Partial Withdrawal Charges: Nil
  • Switches Charges: Nil

Modern ULIP plans including Invest 4G, offer far more flexible options when it comes to being useful to investors. Few of the unique and beneficial features of the plans are as follows:

1. Automatic Portfolio Management Options

If you are keen on building wealth, automating your investments and asset allocation should be your priority. While investment automation is simple with bank mandate, asset allocation requires consistent effort from the funds.

New age ULIP plans offer multiple asset allocation options to maintain your portfolio risk and safeguard your returns from the equity funds. Some of the most useful portfolio management strategies are:

  • Systematic Transfer Option

    Helps you to invest in equity funds with SIPs even when you invest in the plan only once in the year.

  • Return Protection Option

    As your equity portfolio grows this option ensures that you secure your increasing wealth by liquidating and moving the gains to a safer fund. You will need to provide a threshold of gains. Once your portfolio reaches the threshold return the insurer will book the gains.

    Your overall portfolio risk will continue to drop as your portfolio ages in this strategy.

  • Auto Funds Rebalancing

    This strategy ensures that your portfolio risk remains consistent throughout the investment period. You define the ratio of investing in equity and debt fund which the plan will maintain by rebalancing the assets based on performance.

  • Safety Switch Option

    This option works in the last four policy years, and systematically moves all your equity holding to liquid fund. You can use this strategy in combination with any of the three options above.

2. Bonus Additions for Long-Term Investors

Invest 4G plan offers bonus additions for safe investors in the plan. If you keep on investing for a long period of time, usually more than 5 years, the insurer adds bonus units to your portfolio. The longer you invest the more bonus units you receive.

If you are a safe investor, bonus units boost the compounded growth of your portfolio, helping you achieve your goal faster.

3. Systematic Withdrawal Option

The plan also offers a systematic withdrawal option to the investors, which you can use to start a monthly income. This benefit is especially useful if you are using the ULIP plans to save for your retirement goal.

Since all withdrawals from ULIPs after the lock-in period of five years are tax-free, you can create a tax-free pension for yourself.

4. Life-Time Coverage

Life-time coverage is another latest addition to the ULIP features. Under this option, you can continue your ULIP plan till the age of 100. This option is great if you want to build a tax-free pension for life.

These features make ULIP plans the best investment option for retirement savings. However, the only catch with ULIPs is that you cannot invest more than 10% of the base sum assured due to tax laws. Thus, you will need to use the ULIP plan as a supplementary investment plan for your retirement.

Speak to an insurance specialist now!

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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