How did a ULIP policy become a game-changer in the market?

Traditionally, life insurance plans have been simple products. People looking to secure the finances of their loved ones after their demise bought life insurance policies. In return, a premium was paid by the policyholder, which ensured that the policy continued. As the insurance industry developed, new and innovative products were introduced. Endowment plans added a savings element to the life insurance product. However, one of the most innovative and exciting products launched by the industry remains the ULIP or Unit-Linked Insurance Plan. What are ULIP policies and how do they remain a game-changer in the market today? Let’s learn more below. 

Understanding ULIPs as a financial product 

ULIPs fulfil two important aspects that must be present in any successful financial portfolio – the security of a life insurance policy and the wealth creation from investing in the market. Instead of purchasing two different products for these two aspects, a ULIP policyholder can obtain the benefits of both under one single product. 

Like traditional life insurance, a premium has to be paid for ULIPs. However, the premium is not used solely for the life cover. It is also used to invest in the market, via the instruments that suit the policyholder’s risk profile. One can invest in equity funds, or debt funds, or choose a portfolio that balances both. The ULIP performance is determined by the market conditions in the case of equity funds and the rising/falling interest rates for debt funds. 

Important IRDA regulations that transformed ULIPs

A minimum lock-in period of five years

Earlier, ULIPs had a lock-in period of three years. Often, distributors would sell investors ULIPs by showcasing them as a three-year savings plan. Investors were not made aware that the 3-year duration was simply a lock-in period. In reality, the actual benefits would be gained if the investor stayed for a longer duration. To reduce such practices, IRDA increased the lock-in period to five years and increased the transparency around the same. 

This 5-year lock-in period is an appropriate period for an investor to inculcate discipline in their finances. One cannot withdraw from their ULIP within this period. This helps the fund to grow and the ULIP performance remains unimpacted by external intervention. 

Capping on charges 

There is a misconception that ULIPs incur exorbitantly high charges. Though this was true once upon a time, the IRDA took cognizance of that matter and capped the charges. This move has been monumental in increasing the trust of the customer when it comes to ULIPs. Some charges also affected the premium amount which would be invested in the market. Today, however, IRDA has clarified that only some charges would be levied on the premium amount, such as the premium allocation charge. Other ULIP charges, such as the fund management charges, are levied on the value of the fund before the allocation of the net profits to the investor. 

Earlier, policyholders were also charged if they surrendered the policy. In the past few years, this matter, too, has undergone a change. Today, if the investor surrenders their policy before the end of the lock-in period, the surrender charges would be in the range of Rs 1000 – 3000. After the lock-in period, no charges are levied. Do keep these charges in mind as tools such as the ULIP return calculator do not consider such aspects when calculating your returns. 

Increase in life insurance coverage 

The focus on ULIPs as an investment plan was such that the life insurance coverage was quite minimal. IRDA has also been instrumental in changing this factor by enhancing the minimum limit of life insurance coverage. Along with this coverage, the policyholder can also opt for riders. These riders provide an extra level of financial protection. For instance, the accidental death rider provides an additional amount along with the sum assured if the policyholder passes away due to an unfortunate accident. You can use a ULIP return calculator to check the hike in the premium due to the addition of such riders. 

Other features that make ULIPs a distinct product: 

Fund switching – With the help of this feature, an investor can switch from equity funds to debt funds and vice versa as per their needs. 

Incredible tax benefits – Apart from tax deductions up to Rs 1.5 lakhs against the premiums, ULIPs also offer the added benefit of tax-free pay-outs. 

High returns – The performance of ULIPs as an investment option has been considerably well, in comparison to mutual funds and the like. 

If you are planning on investing in a ULIP, do read the terms and conditions before going ahead. Tax benefits are subject to amendments in tax laws.