Prioritise life coverage, financial aims when delving into ULIP investments

Term plan plus MF combo offers greater flexibility and liquidity

Kotak Mahindra Life Insurance launched a unit-linked insurance plan (Ulip) last week called TULIP. Ulips offer a combination of life cover and investment funds. Piyush Trivedi, joint president, head alternate channel and digital channels, Kotak Mahindra Life Insurance, says, “Our plan offers life cover up to 100 times the annual premium while offering market-linked returns on the amount invested.” Most Ulips offer a life cover of around 10 times the annual premium.

How Ulips work
 

The premium paid by the policyholder is split into two parts. Naval Goel, chief executive officer (CEO), PolicyX, says, “One part pays the mortality charge for the life cover while the other is invested in market-linked funds.” Investors can switch from their existing funds to other funds offered by the same insurer without paying any tax.
 

Use them to fulfil life goals
 

By purchasing the waiver of premium (WoP) rider, a Ulip investor can secure the future of a loved one, even if he is himself no longer around. Vivek Jain, head investments, Policybazaar.com, says, “Ulips extend benefits beyond the policyholder’s lifetime.”
 

If a policyholder desires a specific amount to be paid to their family upon death and then wants annual investments to be made by the insurer for a goal (like funding a daughter’s education), a Ulip can facilitate this, but an MF can’t.
 

Ulips offer tax advantages. Trivedi says, “Under Section 10 (10D), all benefits are tax-exempt for annual premiums up to Rs 2.5 lakh.”
 

Capital gains on premium above Rs 2.5 lakh get taxed. Maneet Pal Singh, partner, I.P. Pasricha & Co, says, “On premium above Rs 2.5 lakh, long-term capital gains would be taxed at 10 per cent without indexation while short-term capital gains would be taxed at the individual’s applicable income-tax slab rates.”
 

A large number of online, low-cost Ulips are now available that are superior to their older, higher-cost avatars.

Understand all charges
 

Ulips come with several charges. Goel says, “A Ulip may have charges like premium allocation charge, policy administration charge, mortality charge, and fund management charge which can make it expensive.”
 

In a Ulip, the mortality charge keeps increasing with age. Returns of Ulips are linked to age. 
 

“Suppose one investor is 40 and the other is 50 years old. Both buy the same Ulip with the same tenure and premium. The returns of the older investor will be lower due to the higher mortality charge levied from him,” says Deepesh Raghaw, a Securities and Exchange Board of India (Sebi) registered investment advisor (RIA).
 

Investors cannot exit an underperforming Ulip fund and move to a fund from another insurer (as they can in an MF) before five years. They can also not pull their money out before this period.
 

Fund returns can be misleading. Fund management charge is built into the net asset value (NAV), but mortality charge and policy administration charge are recovered through cancellation of units. Suppose that you have 100 units and the NAV is Rs 400 amounting to a fund value of Rs 4 lakh. After a year, the NAV grows to Rs 420. You would expect the fund value to be Rs 4.2 lakh. That may not be the case because the number of units may have come down (some would have been cancelled to pay charges).
 

Choose the right type
 

Two types of Ulips exist: type I and type II. In type I Ulips, the family gets the higher of the sum assured and the fund value. In a type II, the family gets the sum assured plus the fund value. Investors buying for returns should go for a type I Ulip while those opting for coverage plus returns should buy a type II Ulip. 
 

What should you do?  
 

The term plan plus MF combo offers greater flexibility.
 

Says Jigar Patel, member, Association of Registered Investment Advisors (ARIA): “The new Ulips have lower charges, but they are still more expensive than direct MFs and term plan. Ulips’ costs are lower when compared to a regular plan plus term plan. MF plus term insurance should be preferred over Ulip.” 
 

Kapil Mehta, co-founder, SecureNow, says, “Buy a Ulip where the insurer changes the investment mix with age.”

Benefits of a term plan plus MF combo
 

The premium for the term plan remains constant throughout its tenure

You can buy additional term plans if you need more coverage, allow one or more to lapse if you no longer need the coverage

If a current mutual fund (MF) holding underperforms, you can shift to a plan from any fund house
 

You can liquidate your MF holding anytime you want (you would only have to pay an exit load in case of an early exit)