Illustration: Sudhir Shetty
Unit-linked insurance plans (Ulips) have been rightly bashed by financial planners for their cost structure. No wonder their share in the total new premium declined to 12% in 2017 from 54% in 2010. However, in 2018 there has been renewed interest in new online Ulips that promise to be low cost. Zero commission and low charges: Ulips are known to be loathed for huge charges and commissions in the product structure. However, the online Ulips have either reduced it to minimal or completely removed charges, except fund management cost (also charged in mutual funds) and charges for the insurance cover (mortality charges). IRDAI mandates a fund management charge of 1.35% or less on Ulips.
Instant rebalancing: Ulips allow you to spread your money across multiple funds, based on your risk appetite allowing you to instantly balance your portfolio through the switching option.
This is a benefit where it scores above mutual funds where you have to sell units in a particular fund and wait for the settlement in your account, maybe attract exit load and taxation, before you are able to refactor your portfolio.
Lock-in period: The lock-in period of Ulips is five years, compared with zero to three years applicable in mutual funds. This is a dampener for investors looking for short-term investments.
However, it is a non-issue for investors looking at long term investments, and encourages them to pay and stay instead of getting lured or influenced by market movements.
Comparable fund performance: Though the objective of a fund under Ulip was similar to its corresponding mutual fund, the fund performance was not comparable because the calculation of returns on Ulips did not subtract any charges, apart from fund management charge. With the removal of charges in a set of online Ulips, the fund performance has now become more comparable.
Waiver of premium: At a certain extra charge (around 0.40% to 0.60% on the annual investment), Ulips can provide protection to one’s investment instalments in case of death.
No long-term capital gain tax: Investors are liable to pay 10% long term capital gain tax on profit above ₹1 lakh (without any indexation benefit) made from the sale of equity or equity mutual fund schemes held for over a year. Ulips have not been affected by this tax, giving a significant amount of tax saving to the investor.
Lower flexibility: Mutual funds provide better flexibility over Ulips. You can pause your systematic investment plans (SIPs) in case of a financial crunch or stop your investment if you are not happy with the fund performance.
Ulips will lapse if you do not pay premiums in a disciplined manner. Hence, it works only if you are strongly committed to the investment for more than five years.
Not portable: The investment in Ulip is not portable. Though you can rebalance your portfolio within the investment, you cannot port to another insurer altogether if you are not happy with the fund manager’s performance till five years of lock-in.
Higher mortality charges than term insurance: Every Ulip comes with a life insurance cover that is 7-10 times of the annual premium. The life insurance cover embedded in the investment plan is deducted from the accumulated units.
These charges in most cases could be almost three times higher than what you would pay for the same life cover, taken through a term life insurance plan.
Hence, if the investor’s primary goal is protection, they should not consider Ulips as an option at all.
Mahavir Chopra is director health, life and travel insurance, Coverfox.com