Should I Invest In ULIPs?

ULIP is a life insurance plan that combines insurance coverage with investing exposure. After the imposition of the long-term capital gains (LTCG) tax on investments in equities and equity-linked instruments, ULIPs gained popularity. Gains on equities investments held for more than a year were tax-free for many years. For gains over Rs 1 lakh, the Union Budget 2018 included a 10% long-term capital gain (LTCG).

ULIPs are insurance-and-investment-in-equity-and-debt-based hybrid products. However, in the past, they were mostly promoted as stock investment vehicles. ULIPs had an unfair benefit in the form of Section 10 exemption after equity became taxed in 2018. (10D).

Many high-net-worth individuals have been drawn to this tax-free status in recent years and have been investing in equity through ULIPs to take advantage of this tax arbitrage. They avoided paying capital gains tax in this way. ULIPs aren't as appealing now that the tax exemption has been removed.

Should I Invest In ULIPs?

Below are a few reasons why you must invest in a ULIP:

1. Possibly Superior To Others

In comparison to other insurance products, ULIPs provide much higher returns. ULIPs invest money in a variety of asset classes. Despite the fact that tax-saving funds provide significantly larger returns, the policyholder can choose a different fund each year based on its performance. The amount paid out at maturity is determined by the performance of the equity markets during the fund's lifetime. Endowment plans, on the other hand, pay a certain sum at the conclusion of a set period of time. A 5-year lock-in period applies to tax-saving FDs. Returns are then added to the investor's income, which is then taxed according to the tax bracket. Investors who formerly preferred FDs are gradually shifting their focus to insurance and mutual funds. A growing number of people are choosing ULIPs as a result of changes in investment patterns and the availability of market-linked tools like ULIPs.

2. Lock-In Duration

ULIPs typically have a three- to five-year lock-in period. After the lock-in term expires, the policyholder can choose to cancel the insurance. The accrued corpus is transferred to a discontinuation fund in this circumstance. It is a legal requirement for all insurance companies to provide returns to their customers. The primary goal of the discontinuation fund is to give funds from a lapsed plan. Liquidity is not available to the policyholder during the lock-in period. The assured can withdraw money as needed once the lock-in term expires. After deducting the necessary discontinuance/surrender fees, the money will be given. Except for fund administration costs, the insurance provider is not allowed to charge anything after the lock-in period ends.

3. Structure Of Charges

ULIPs typically have five different charges: policy administration, premium allocation, fund management, surrender, and mortality. The administrative fee is applied to the upkeep of the ULIP. Because of the underwriting cost fund management, the policyholder will have to pay a higher premium allocation charge during the initial period. Typical fund management fees range from 0.5 percent to 2%. When a policyholder surrenders it before the policy's maturity date, a surrender charge is applied. The expense of providing life insurance to the assured is referred to as the mortality charge.

During the first few years, the policyholder is subjected to increased fees. In the long run, the charges will be lower and the profits will be higher. Because ULIPs provide strong long-term returns, the policyholder does not need to pay any of these five fees. The ULIP charges are regulated at 3% per IRDAI regulations. As a result, the policyholder will have to pay less and will be able to earn better returns.

4. Option To Switch

The quantity allocated to equities and debt instruments fluctuates based on the risk appetite of the investor. This switching facility allows policyholders to transfer all or part of their investment from one fund to another without incurring any fees. 

Conclusion

ULIPs have been extensively offered (or pushed) under the guise of merging investment and insurance, claiming equity-like returns and tax-free status (till now). However, only a few ULIP agents or banks were forthcoming with the complete information and true return profile of ULIPs. Because there is no tax-free maturity benefit, at least one component of the sales pitch is handled appropriately.

Also read - How to Buy the Best ULIP in India?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.