Protection + Returns!! Want To Know More?


You know, how as kids we always had this urge to expand abbreviations using our creativity and then showcasing it to the whole world for laughs. Well, now we aren’t kids anymore (Though on children’s day, most of the Whatsapp texts ask me to keep the child in me alive 😛 ) but still, when I asked my friend if he had any idea of ULIPs, this is what he said: Yes, I know ULIPs. They stand for Unclear lackluster investment plans. Surely, it made me laugh first, but at the same time, I took the opportunity to talk about ULIPs and their significance. It just took a few minutes out of his schedule but he walked away with good knowledge of ULIPs. So, here I am, trying to do the same for you so that you may employ your creativity better and expand some other acronym 🙂

A Unit Linked Insurance Plan (ULIP) is a financial product which offers dual benefit of protection and investment/returns. Basically, it is an insurance policy/plan that is linked to capital markets. Under such a plan, a part of your investment goes towards providing you with a life cover and the remaining portion is invested in a fund. This fund then invests the money into the capital markets (equity, debt or both as per the plan of the vendor).Till here, I have just talked English and barely any finance and therefore, I am assuming that you would have understood the concept behind a ULIP. Wow, the first step is done and now that you have understood the ULIP funda, let us proceed to know more about this product.

The more, the better 😉

If you had to pass some financial aptitude quiz then knowing this much would be enough [they ask no more 😉 ] but I believe that your objective is to invest in a ULIP some day and for that, we have to drill down deeper. Before I go on to cover the kind of charges that are involved in a ULIP, the tax treatment of a ULIP etc. let me talk briefly on why I chose ULIPs as a point of discussion for this post. Let me warn you that the next 4 lines or so might be boring as they discuss history of ULIPs [don’t we hate histories] but if you have come till here, I am sure you will do just fine.

After the 2008 financial meltdown, Indian indices also took a bad hit and during that phase, ULIPs became a maligned product owing to lower returns and other structural flaws. However, ULIPs got a good makeover in 2010 in terms of product features and regulations. Now, after the elections in May, the stock market has seemingly embarked on an incessant rally and as a result, the stock market rally plus modifications in ULIP’s structure has brought this product back.Therefore, in a way, this is the best time to know about ULIPs.

YAYYY, you have now successfully gone past the history without yawning [sarcasm intended]. So, now you know of a couple of things about ULIPs i.e the meaning and their significance/relevance. Hoping that you are somewhat convinced of investing in an ULIP [if not, just see the growth in BSE sensex and you would feel the itch to make some money], let me straightaway jump to the charges that are involved while investing in a ULIP.

In terms of charges that are involved in a ULIP, it is important to understand that certain charges which may vary according to vendor and plans and hence, it is always advisable to go through the brochure/sales pamphlet or any other document that enlists the features of a particular ULIP. Now, there are approximately 8-9 broad charges that are involved in case of a ULIP. However, I believe that it is not wise to load you with all the information at once primarily because a good number of these charges are levied only when you exercise special features. Hence, the prudent thing to do is to go through the information provided by the insurer while purchasing the policy and that too, quite thoroughly. Undermentioned are a few charges that are common and mostly levied in case of a ULIP.

a. The Allocation charges: Charged as a percentage of premium upfront, the quantum of this charge varies across vendors, with a general maximum of 2 percent. Remember that it is taken before allocation of any units under the plan and is normally highest in the first year.

b. Policy/Administration charges: Simply, a fee taken for administration of policy. However, the way it is deducted is a bit abnormal. Basically, the charge is recovered through cancellation of units rather than a money transaction.

c. Fund management fees: As with any mutual fund, the fund manager of a ULIP fund does not work for free as well. Hence, this fee is deducted before arriving at NAV of the units.

Well, this is pretty much it. Yes, there are a few other charges as well but I do not think it is necessary to burden you with all information now. I believe you are quite smart to figure out these charges, when asked to pay and in case you might have problems then, we have a 24*7 assistance portal just for you.

Something grand, in the end! (woah, so bad rhyming)

To be honest, it is not something grand but since it is the end of this post, I thought to build up some climax :P. But, yes, as I promised, here is what you need to know about taxation of ULIPs.

Any premium you pay on the ULIP qualifies for deduction u/s 80C (just remember this one section, please) and the overall limit for deductions u/s 80C is INR 150,000 for A.Y 2015-16. However, the deduction is only applicable to the extent of 10 percent of sum assured. Any amount over and above that limit, will not qualify for deduction.

In case of a ULIP, there are couple of ways in which a payout is possible. One of them is the receipt of money by nominees on the death of the policyholder. As per tax laws, the money received by nominees is TAX-FREE.

Second payout route is payment on maturity of the plan/policy. In that case as well, the receipt is treated as payment received u/s 10 (10D) [No need to remember this section] and is also TAX-FREE. In fact, it is important to note that not all life insurance policies enjoy such a benefit u/s 10 (10D). However, ULIPs do.

Well, that is about it for this post 😀

Thank you for reading through and stay tuned for upcoming post on “A comparative study of different ULIPs”,