Leading private life insurers such as HDFC Life, ICICI Prudential Life and Max Life witnessed an increase in the proportion of sum insured contributed by unit-linked insurance plans (Ulips) in the first quarter of 2024-25, according to a report by Kotak Institutional Equities.
Meanwhile, Nithin Kamath, Founder and CEO of Zerodha, recently tweeted that while Ulips promises the best of both worlds (investment and insurance), the reality is that it offers the worst of both. He added that it was better to buy a term insurance plan and mutual funds separately.
Market dynamism drives change
A key factor behind the shift in favor of Ulips is regulatory interventions.
“The Insurance Regulatory and Development Authority of India (Irdai) introduced stricter regulations. It clarified the scope of charges that could be levied. It ensured greater transparency in charges and better communication about them,” says Nitin Rao, Head of Product and Propositions, Epsilon Money Mart.
This forced insurers to introduce more cost-effective and customer-friendly products. “Manufacturers have eliminated the policy administration fee,” says Rao.
The performance of the Indian stock market has also played a role. “The continued buoyancy of the Indian market has played a major role in attracting investors, especially the younger demographic, towards Ulips,” says Nitin Mehta, head of distribution for the association and head of marketing for Bharti AXA Life Insurance.
Market-linked profitability
Being market-linked, Ulips have the potential to offer higher returns than traditional insurance plans.
Investors can select equity, debt and hybrid funds that suit their asset allocation. “The flexibility to switch between fund options within a Ulip allows investors to tailor their investment strategy to market conditions,” says Mehta. These switches come with minimal or no fees.
The five-year lock-up is useful for investors who tend to use money earmarked for long-term goals or pull money out of stocks during downturns.
Prepare for confinement
The mandatory five-year lockup restricts liquidity.
Investors should be prepared for volatility. “Market fluctuations can impact returns, given the risks associated with any equity investment,” says Mehta.
Some Ulips could still be expensive due to a long list of charges: fund management, mortality, surrender, exchange, etc.
At Ulips, age affects the mortality charge (the cost charged for providing insurance). It is higher for older people, which affects their earnings.
In a Ulip, if a fund underperforms, the client cannot move to another insurer’s fund until the lock-in period ends.
Who should invest?
A long-term horizon is a must. “Ulips are ideal for people who plan to reach a major financial milestone in 10-15 years,” says Pankaj Gupta, CEO and MD, Pramerica Life Insurance.
Younger people, who typically have a longer investment horizon that allows them to handle interim volatility, might opt for them, according to Mehta.
Risk-averse investors should avoid them. Those who want greater liquidity and the option to reduce hedging should opt for a combination of term plan and mutual fund.
Points to remember
Before purchasing, check the different fees associated with a Ulip.
Between Type I and Type II, choose the one that best suits your needs. A Type I Ulip offers a death benefit equal to the sum assured or the value of the mutual fund, whichever is higher. A Type II Ulip offers a death benefit that includes both the sum assured and the value of the mutual fund, but generally has a higher premium.
Finally, understand the funding options available and evaluate their long-term track record.
Understanding Ulip Taxation
· Ulips offers a tax deduction under Section 80C of up to Rs 1.5 lakh in a financial year
· Ulips purchased on or after February 1, 2021 enjoy tax exemption on the maturity proceeds if the annual premium (in total) is up to Rs 2.5 lakh; if the total annual premium exceeds this amount, the maturity proceeds become taxable (death benefit remains exempt)
If you buy two new Ulips on or after February 1, 2021, and your total premium exceeds Rs 2.5 lakh, the payment for both will be taxable.
· Ulips purchased before February 1, 2021, remain tax-exempt as long as their sum insured is equal to or greater than 10 times the annual premium.
First published: August 28, 2024 | 19:36 IS
Disclaimer
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.