Unit-linked insurance plans (ULIPs) are among the most transparent flexible long-term goal-based retail investment products. They provide protection as well as create wealth. A part of the premium is used to provide life cover, while the rest is invested in funds selected by the policyholder, from a range of options with different debt and equity exposure, on the basis of the investment objectives and risk appetite.
ULIPs diversify investments and diffuse risk over the long-term, by offering funds with different asset allocations. ULIPs provide a convenient solution to individuals to fulfill their longterm financial goals. With a minimum lock-in, premium payment term of five years and no partial withdrawals allowed during this period, ULIPs encourage long-term investments. As the capital market is inherently volatile, a long-term investment horizon reduces the volatility and leads to consistent wealth maximisation.
ULIPs provide policyholders some flexibility to meet their changing needs. They can select their own asset allocation by choosing fund options, redirect future premiums to different funds and switch between funds in the light of changing risk appetite and investment objectives. ULIPs offer a very high degree of transparency as all the charges, fund NAVs, portfolio, performance, assets under management, asset allocation, rating and maturity profile are stated clearly. A policyholder is allowed partial withdrawals and can avail loans against the ULIP.
ULIPs offer a minimum insurance cover of 10 times the annual premium for policyholders below 45 years and seven times for those aged 45 years and above. The charges are evenly distributed in the initial five years. Further, the difference between the gross and net yields and the discontinuance charges, which need to be paid by policyholders on premature exit, has also been capped. Investments in ULIP are covered under Section 80C of the Income Tax Act.
Notable recent changes are the increase of lock-in period and cut in the commission given to the agent. ULIPs with new guidelines incorporated into them have been available since September 1, 2010. The increase in lock-in period from 3-5 years is applicable to each and every ULIP. Policies that have lapsed, surrendered or discontinued during this period will receive no residuary payments. Residuary payments for policies that are lapsed, surrendered or discontinued while they are still under the lock-in period would be paid only upon completion of the lock-in period.
If any additional payments are made, they will be considered as single premium for the insurance cover. It is mandatory for all ULIPs to provide at least mortality or health cover, except in case of pension and annuity products. At any given time, the annual health cover should not be less than 105 percent of the premiums paid. Every ULIP pension or annuity product must present a minimum guaranteed return of 4.5 percent per year or as mentioned by IRDA periodically on the date of maturation.
The maximum loan on any ULIP should never be more than 40 percent of the net asset value, if the equity of that particular product amounts to greater than 60 percent of the entire share; and it should not be more than 50 percent of the net asset value of that particular product if debt instruments add up to more than 60 percent of the value.