Is ULIP a high-cost product? Here’s why it’s not

If you’re looking for a financial product that offers you the dual benefits of life insurance and an investment, along with tax saving benefits, a Unit Linked Insurance Plan (ULIP) may just be it. ULIPs are one of the most popular investment plans, among all other financial products available in India. This is because they are cost-effective, convenient, and help in wealth creation. ULIPs use a part of the premium paid towards the insurance cover and the remaining is invested to help you meet your financial goals. 

Types of ULIPs

Depending on where the investment component of the premium is used, there are mainly three popular forms of ULIPs: 

• Equity Funds: Premium is invested in the equity market and hence, the risk is higher. 
• Balanced funds: Here the premium is divided between the equity market and debt market. Risk is minimum for the investors.
• Debt funds: The premium is invested in debt instruments. Comes with both, low-risk and comparatively lower returns. 

There are fund managers in the insurance companies that track the ULIP investment. The best thing about a ULIP policy is that an investor gets the flexibility to change the portfolio between debt and equity based on their risk appetite and changing financial goals.

You can also take the help of the ULIP return calculator to find out which type of ULIP is best for you. A ULIP return calculator will help get an idea of how much you need to invest to achieve your goal, and what proportion of it should be invested in market-linked instruments vs risk-free instruments. 

People have the misconception that the charges associated with the ULIP policy make this option a costly investment instrument, but that’s not true.  In fact, one of the main benefits of ULIPs is that, in addition to wealth creation, it’s cost-efficient. Like with every other investment, ULIP policies come with certain standard charges and it’s best to know about them before making your decision. 

• Charges related to premium allocation

Premium allocation charges are deducted from the premium paid to the insurance company to recover the costs of processing the insurance component of your ULIP such as underwriting costs, distributor fess, etc. It is higher in the initial years of the plan and comes down as the plan progresses. The premium allocation charge varies depending on factors like the payment mode, amount, and insurer. 

• Mortality charges

Mortality charges are levied for the insurance cover component of the ULIP policy. The insurer, in return for the mortality charges, provides insurance death benefits. This means that in case of the demise of the policyholder, their family will receive the insurance payout. The mortality charges depend on factors such as sum assured, age, etc. Some insurers include the cost of mortality charges in the plan at the initial stage only.

• Fund management charges

There is a fund management charge associated with ULIPs. It is a small percentage of the fund value to be paid to the insurance company for managing the ULIP. These charges are deducted from the net asset value of the funds generated per day. The maximum limit for fund management charges is 1.35% of the fund value. 

• Policy administration charges

Policy administration charges are levied to cover the cost of operating the ULIP policy. The cost is associated with the paperwork, overheads, and communication. These charges remain the same throughout the term of the insurance policy or may vary at a pre-determined rate. 

What makes ULIPs cost efficient? 

• Low-cost online ULIPs

Many insurance companies are using online platforms to drive their business. By doing this, the insurance companies do away with distributors and intermediaries. This minimises the overhead and operational costs, thereby making the plan more affordable for policyholders. 

• Long-term capital gains tax (LTCG):

The tax benefits associated with ULIP plans are much higher than equities and mutual funds. Returns on ULIPs are tax-free, if the premium paid is not over Rs 2.5 lakh per year. Even switching funds in ULIPs does not attract any tax payments, unlike mutual funds or equities. It is also one of the reasons that ULIPs are not high-cost products.

Conclusion 

A ULIP policy can be a great option for all those looking for a long-term investment plan, typically with a tenure of 10 years or more, along with a life cover. Prior to undertaking an investment such as a ULIP, it’s essential to do some research and find out the necessary information about the ULIP policy and the insurance company.

Once you have finalised the ULIP type, analyse the ULIP returns in 10 years. Compare the various ULIP offers in terms of premium payments, performance, background expenses, etc. Only make your investment decision once you have researched on all these important aspects of the ULIP policy.