A Unit-Linked Insurance Plan (Ulip) is a product offered the dual benefits of insurance and investment under a single integrated plan, which is beneficial for achieving a goal of an individual/family or group of persons. Ulip holder enjoys the benefit of insurance what generally life insurance companies offered in India, and also earn returns what mutual fund unit’s holder get in the market on the regular premium pay in Ulip.
The concept of a Ulip is that a part of the premium paid is utilised to provide insurance to the policyholder while the remaining portion is invested in various equity and debt schemes to earn returns. As in a mutual fund, the money collected by the company is utilised to form a pool of funds that is used to invest in various market instruments (debt and equity) and the returns generated from those instruments will be distributed to Ulip holders based on allotted units.
The net rate of returns on a Ulip is determined based on Net Asset Value (NAV) which is declared every day. The NAV varies from one Ulip to another based on market conditions and the fund’s performance.
A Ulip is a very high costs complicated investment product doesn’t generate a decent return at any point of time, which creates misconception in general for evaluations due to product structure. Although it offers the dual benefits of insurance and investment, but it is an unpopular product due to low liquidity, lack of transparency and low return.
The higher charges and low returns are the main causes for the failure of Ulip in India. The insurer deducts charges towards life insurance (mortality charges) and premium allocation charges from the premium you deposited in your policy. Premium allocation charges in Ulip are very high in the first year (20 to 30 per cent) and thereafter it lowers.
Administrative expenses and fund management fees (2 to 2.25 per cent per annum) are charged by the insurer every month by cancelling the units proportionately from the funds allotted to your policy. Conversely, a small amount is invested in a fund in the initial year of the policy, which generate very low return irrespective of market conditions.
Annual premium paid for a Ulip is eligible for tax deduction under section 80C. In case you discontinue a Ulip premium before 5 years, you will not be allowed any tax benefits taken in the previous years that shall get added back to your income in the year in which Ulip is closed. Tax treatment also varies from product to the products.
The real problem lies in the Ulips as bundled of the complicated products offered by the insurance companies in the market. You should never mix investment and insurance goals on a single product. In order to maximise the benefit, it is prudent to take separately a cover of term insurance for your life and goal centred investment through a mutual fund. Don’t confuse while investing your hard-earned money?
The IRDAI should completely phase out these complex products of Ulip from the market, as agent and intermediaries miss-sell these products to innocent customers. The investor’s hard-earned money is not protected due to failure and bad regulatory system. Investors should protect themselves from such confusing products (Ulips) and invest only where they understand the product and its structure properly.
R K Mohapatra is AGM/ Finance in IRCON & an eminent author.
