The Insurance Regulatory and Development Authority of India (IRDAI) has asked life insurance companies not to advertise Unit Linked Insurance Plans (Ulips) as investment products. It has also urged them to disclose their risk factors.
Ulip-MF confusion may reduce
Click here to connect with us on WhatsApp
Some insurers have been advertising their mid and smallcap funds heavily. Some distributors and agents have also piggybacked on the popularity of mutual funds (MFs) to sell Ulips. Many customers buy without understanding whether the offering is from an insurer or a fund house.
“A cursory glance at some insurers’ advertisements could lead less savvy investors into thinking they are investing in a fund. The reality is they would invest in a Ulip, which would invest in a fund. In a Ulip, one bears a mortality charge for the insurance cover,” says Deepesh Raghaw, a Sebi-registered investment advisor (RIA).
The mortality charge increases with age.
“A higher charge is deducted in the case of senior citizens, leading to a bigger impact on the maturity amount,” says Arvind A Rao, founder, Arvind Rao and Associates.
After IRDAI’s directive, insurers may highlight both the insurance and investment aspects of Ulips, reducing the confusion among investors.
Lock-in: Useful for some
Ulips have a five-year lock-in.
This can be useful for investors who use up the money meant for long-term goals for short-term goals or panic and withdraw money from equity MFs during downturns.
In a Ulip, if the premium is up to Rs 2.5 lakh per annum, the maturity amount is tax-free. Rebalancing between funds is also tax-free. In equity MFs, there is a 10 per cent tax on long-term capital gains.
Ulips offer the waiver of premium feature. “If you are saving for your child’s education and want a certain sum for her when she is of college-going age, you can ensure through a Ulip she gets it even if you are not around,” says Raghaw. In case of a term plan, the family gets the payout and could spend the money.
Liquidity issues
Liquidity is a challenge. “If you have an emergency requirement, you cannot pull out money in the first five years,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
A person’s life insurance requirement reduces as she gets older and wealthier. Combo products don’t allow reduction in coverage.
Raghaw informs that a Ulip’s mortality charge is usually higher than that of a term plan.
In a pure investment product, if two people, one 30 and the other 55, invest the same amount in the same fund, they get the same return. “In an insurance-cum-investment product, the elderly person gets a lower return as she pays a higher mortality charge,” says Raghaw. A person also runs the risk of remaining underinsured in them.
In a Ulip, if the fund you have invested in underperforms, you cannot move to another insurer’s fund until the lock-in ends.
Run these checks
Before investing in a Ulip, check your horizon. “Ulips are an excellent product for customers who believe in long-term wealth creation over more than 10 years,” says Piyush Trivedi, head–alternate, digital channels, product marketing & health tech, Kotak Mahindra Life Insurance Company.
Investors should also check their liquidity needs and premium-payment ability and whether they have space within Section 80C to avail of the deduction.
Ulips are of two types: type I and type II.
In a type I Ulip, in the event of the policyholder’s demise, the nominee gets the higher of the investment value or the sum insured. In a type II Ulip, the nominee gets the sum insured plus the investment value. “If you are investing in a Ulip for returns, go for a type I Ulip. If you are investing for insurance cover as well, type II is better,” says Raghaw.
Before investing, check the past performance of the various funds of the insurer. Investors who desire greater flexibility (liquidity, option to reduce cover) should go for a term plan-MF combo.
