With lower sum assured, Ulips emerge as attractive option with high returns

Unit Linked Insurance Plans (Ulips) offered by insurance companies, which combine insurance with investment, are fast emerging as an attractive option. This has happened because of the change of rules brought about by the insurance regulator.
 
Recently, the Insurance Regulatory and Development Authority of India (IRDAI) allowed those under the age of 45 years to also buy Ulips with a lower sum assured. Earlier, the sum assured for such people had to be at least 10 times the annual premium. According to experts, this change of rule has increased the attractiveness of Ulips. “This regulation has made the insurance cover in Ulips uniform across all age groups. Earlier, only people above 45 were eligible to buy Ulips with sum assured less than 10 times their annual premium. Now, even people below 45 can buy Ulips with a minimum sum assured of seven times the annual premium. The smaller sum assured will lead to better returns over time as the mortality charge deducted from the premium will be less. A larger part of the premium will get invested, improving returns,” says Santosh Agarwal, chief business officer–life insurance, Policybazaar.com.

The latest change is part of a long process of regulatory overhaul. Earlier, Ulips received a lot of flak from customers for their high charges and commissions. They have evolved and become more transparent and reliable since. “New-age Ulips are zero-commission products. They also come with very low costs. Charges like premium allocation and policy administration are usually zero. The fund management charge is capped at 1.35 per cent by the regulator and usually ranges between 1-1.35 per cent. Also, many companies now offer a feature called return of mortality charges (ROMC),” says Agarwal.
 
Experts say Ulips are now well placed to compete with mutual funds. According to Naval Goel, chief executive officer, PolicyX.com, “New Ulips have emerged as the perfect alternative to mutual funds. They offer safety and sound returns as well. Despite being a market-linked instrument, Ulips continue to be out of the purview of long-term capital gains (LTCG) tax.”
 
With a portion of the premium being invested in the market, Ulips have the potential to provide high returns if the equity market is on the upswing. But short-term dips also reflect negatively on their returns. As with all equity-linked instruments, investors need to put money for the long term to ride out market volatility. “It is advisable to invest in them early in life and stay invested for a longer period to achieve long-term goals and accumulate wealth,” says Agarwal. Also, if a customer buys a Ulip at a younger age, it is likely to give her better returns. This is because the mortality charge is lower for younger customers, and hence a higher portion of the policy premium gets invested in the markets.
 
Investors need to keep a few things in mind before investing in Ulips. Since these are market-linked instruments, they come with market risks. “Invest in Ulips only if you have the necessary risk appetite and investment horizon. Also, never let tax planning be the sole motivator for investing in them," says Goel. Finally, remember that the premium paid for Ulips is allowed as a deduction up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Income and gains from Ulips are tax free under Section 10(10D).