Unit-linked insurance plans, abbreviated as ULIP, enables one to invest money in multiple funds at once. What gained popularity in 2010 once, was, later on, criticised by many for their cost structure. It comes as no surprise that ULIPs lost their share in total new premium by 42% in 2017 from 2010. However, a recent trend in 2018 has surfaced where people are moving towards new online Ulips that promise to be low cost. They are infamous for huge charges and commissions in the product structures, but the reformed Ulips have either removed or minimised all the charges, except fund management cost and insurance coverage charges.
Rebalance immediately: Because of its ability to let you spread your investment widely across many funds, you can instantly balance your portfolio with the switch option based on your risk-taking ability.
This is the place where it supersedes mutual funds. In mutual funds, you have to sell the units in a particular fund and wait for the settlement in your account, then levy exit load and taxation, before you can rebalance your portfolio.
Lock-in period: Unlike mutual funds, which have zero to three years Lock-in period, Ulips have a 5 years lock-in period. This makes it unsuitable for short-term investors.
However, it’s a thumbs up for long term investments and keeps the investors stay steady instead of being influenced by market movements.
Fund performance: Earlier the fund performance of Ulips was not comparable to its competitor mutual funds. The reason was the lack of subtraction of any charges during the calculation of returns on it. However, the reformed online Ulips have overcome this issue and now they have comparable fund performance.
Premium waiver: Ulips can provide protection to one’s investment instalments in case of death by paying an extra charge of around 0.4% to 0.6% on the annual investment.
Get free from long-term capital gain tax: Selling equity or equity mutual funds (held for more than a year) attract a 10% long term capital gain tax on profits above INR 1 lakh without any indexation benefit. Ulips do not have any such tax, which can save a lot of tax on investors.
Less flexibility: Ulips do not compare to Mutual funds in terms of flexibility. A systematic investment plan (SIP) has the pause feature which allows you to hold the investments in case of a financial crunch, you can also stop the investment if you are unhappy with the fund performance.
On the other hand, Ulips lapse if you will not pay premiums in a disciplined fashion. Hence, it is best only in the case when you are highly committed to investing for more than 5 years.
No portability: You cannot port your investment in Ulip. However, you have the option to rebalance your portfolio within the investment, you do not have the option to port to another insurer. You are locked-in for five years with the whole investment.
More mortality charges: A Ulip comes with a life insurance cover that is 7-10 times of the annual premium. The life insurance cover is deducted from the accumulated units.
Mostly, these charges can be almost three times higher than what you would pay for the same life cover, taken through a term life insurance plan.
Hence, Ulips is not a good option if you are looking for protection.