Legacy plan: Whole-life Ulips can be used to bequeath funds outside of Will

The wealthy high networth individuals (HNIs) seem to have found a new instrument to pass on their wealth with little or no tax impact–unit-linked whole life policies. These policies allow holders to save during their living years, and on death leave the corpus for their beneficiaries. Whole life plans have been around for several years. Earlier, they were available only as traditional plans that offered low returns. With the same feature available in Ulip format now, an insured can earn market-linked returns.

Insurers say that whole life Ulips are like a ‘mini trust’ that can help a policyholder bequeath funds. “In a trust, the donor defines the asset a beneficiary will get and creates certain conditions for it. A trust also helps to ring-fence assets. In a whole life Ulip, the insured can decide on the premium. The policy can be ring-fenced using the Married Women Property Act,” says Deepak Mittal, MD and CEO, Edelweiss Tokio Life Insurance.

Like other Ulips sold through agents, whole life plans have high costs in the initial years, which fall gradually. An individual would need to stay for a long tenure, 15 years or more, to bring down the cost of the product significantly. “Even if we keep aside the disadvantage of Ulips vis-a-vis other investment products like mutual funds, the former would still be more expensive for a higher-aged policyholder. If someone buys this product after 45 or 50, the mortality charge would be considerable,” says Arvind Rao, a Sebi-registered investment adviser.

Works in specific cases: The key difference between other Ulips and whole life Ulips is the policy tenure. Regular Ulips have an average tenure of 20 years, which can go as high as 30 years. But the tenure of whole life Ulips depends on the policyholder's age. Edelweiss Tokio Life's Wealth Ultima and Tata AIA Life Insurance's Fortune Maxima cover the insured until the age of 100. PNB MetLife Whole Life Wealth Plan continues until the policyholder attains the age of 99. The policyholder can save for a much longer period through these instruments.

In a whole life Ulip, the sum assured can also be higher than regular Ulips, where it is 10 times the annual premium. “While the cover continues for the whole life, the quantum of cover ranges from 10 times to 35 times the annual premium based on a customer’s age,” says Khalid Ahmad, head–products, PNB Metlife Insurance. There’s a different formula to calculate the sum assured in a whole life Ulip. Suppose that a person takes a whole life Ulip at the age of 40. His cover will be 70 minus age at entry divided by two. In this example, it will be 15 times (70-40/2). 

The insured also gets many options depending on his need. “The best part of a Ulip is the flexibility it offers. You can switch from equity to debt funds free of cost or can opt for a portfolio strategy like life stage, where allocation between debt and equity is based on age. You can also decide how long you want to pay premiums to plan your cash flows,” says Ahmad.

Ulips, however, have their drawbacks when compared to other investment instruments like mutual funds. In the latter, you can change your fund house if the fund underperforms. The cost structure is also more transparent in mutual funds. Ulips have a higher lock-in of five years. Investment advisors, therefore, feel that whole life plans may not be suitable for everyone. “They would work for someone looking to leave funds for a specific person, like a disabled dependant, or someone who is not an immediate family member. If the individual tries the same through a Will, it could be challenged in court and it could take much longer for the beneficiary to get his dues,” says Rao.

Moreover, if a person has multiple assets, including property, as most people do, he will anyway need to opt for a Will or a trust to bequeath assets. One of the easiest and most tax-efficient ways to transfer an asset to an immediate family member is by gifting it.

Avoid the noise: Many agents are selling whole life Ulips with the sales pitch that they are the best way to avoid inheritance tax, which may be introduced soon. “There has been no formal announcement or even indication that the government is planning to introduce inheritance or estate tax soon,” says Ashok Shah, partner, NA Shah Associates. 

Works as a retirement tool: Insurers say that many people are also investing in whole life Ulips for retirement planning rather than to leave a legacy. “Regular pension products require the policyholder to buy an annuity with two-third of the corpus mandatorily. He can withdraw only one-third of the corpus as lump sum,” says Santosh Agarwal, head of life insurance, Policybazaar.com. Annuities also offer lower returns. Income from an annuity is also taxed in the investor's hand at the marginal tax rate. Agarwal is of the view that whole life Ulips may be a more efficient way to invest for  pension, but suggests checking the costs before opting for one. She also points out that as the cover is higher, the mortality charges could be considerable. 

If an individual invests in a whole life Ulip, once the mandatory five-year lock-in gets over he can opt for a systematic withdrawal plan or make partial withdrawals as and when he needs the money. There will be no tax on such withdrawals. “We have observed that those between 30 and 40 years are looking at whole life Ulips for legacy planning while those above 40 are choosing it for retirement planning,” says Mittal.

Most investment advisors, however, say that for a long-tenured goal such as saving for retirement, they would prefer mutual funds over Ulips. "Investors should not commit all their long-term funds to one company," warns Malhar Majumder, a certified financial planner.