Investment and insurance: Invest in Ulip with above 10-year horizon

Leading private life insurers such as HDFC Life, ICICI Prudential Life, and Max Life witnessed a rise in the share of sum assured contributed by unit-linked insurance plans (Ulips) in the first quarter of 2024-25, according to a report by Kotak Institutional Equities.

Meanwhile, Nithin Kamath, founder and chief executive officer (CEO) of Zerodha, tweeted recently that while Ulips promise the best of both worlds—investment and insurance—the reality is that they offer the worst of both. He added that it was best to separately buy a term insurance plan and mutual funds.

Market buoyancy driving shift  

One key factor behind the shift in favour of Ulips is regulatory interventions.

“The Insurance Regulatory and Development Authority of India (Irdai) introduced stricter regulations. It provided clarity on the extent of charges that could be levied. It ensured more transparency on charges and better communication in this regard,” says Nitin Rao, head, products & proposition, Epsilon Money Mart.

This forced insurers to introduce more cost-effective, customer-friendly products. “Manufacturers have eliminated the policy administration charge,” says Rao.

The Indian equity market’s performance has also played a part. “The continued buoyancy of the Indian market has played a major role in driving investors, especially the younger population, towards Ulips,” says Nitin Mehta, chief distribution officer–partnership distribution and head of marketing, Bharti AXA Life Insurance.

Market-linked returns

Being market-linked, Ulips have the potential to offer higher returns than traditional insurance plans.

Investors can select equity, debt, and hybrid funds to match their asset allocation. “The flexibility to switch between fund options within a Ulip allows investors to adapt their investment strategy to market conditions,” says Mehta. These switches attract zero or minimal charges.

The five-year lock-in is useful for investors who tend to use up the money meant for long-term goals or withdraw money from equities during downturns.

Be prepared for lock-in

The mandatory five-year lock-in restricts liquidity.

Investors need to be prepared for volatility. “Market fluctuations can impact returns, given the risks associated with any equity investment,” says Mehta.

Some Ulips could still be expensive due to a long series of charges- fund management, mortality, surrender, switching, and so on.

In Ulips, age affects the mortality charge— the cost levied for providing insurance. It is higher for older people, affecting their returns.

In a Ulip, if a fund underperforms, the customer cannot move to another insurer’s fund until the lock-in ends. 

Who should invest?

A long horizon is a must. “Ulips are best suited for individuals planning for a significant financial milestone 10-15 years later,” says Pankaj Gupta, managing director & CEO, Pramerica Life Insurance.

Younger people, who usually have a longer investment horizon which allows them to handle the interim volatility, may go for them, according to Mehta.

Risk-averse investors should avoid them. Those who desire greater liquidity, and the option to reduce cover, should go for a term plan-mutual fund combo.

Points to remember

Before purchasing, check the various charges associated with a Ulip.

Between type I and II, choose the one that suits your needs. A type I Ulip provides a death benefit equal to the sum assured or the investment fund value, whichever is higher. A type II Ulip provides a death benefit that includes both the sum assured and fund value, but usually comes with a higher premium.

Finally, understand the fund options available and assess their long-term track record.

Understanding Ulip taxation

·       Ulips offer tax deduction under Section 80C up to Rs 1.5 lakh in a financial year

·       Ulips purchased on or after February 1, 2021, enjoy tax-exemption on maturity proceeds if the annual premium (in aggregate) is up to Rs 2.5 lakh; if the aggregate annual premium exceeds this amount, the maturity proceeds become taxable (death benefit remains exempt)

·       If you buy two new Ulips on or after February 1, 2021, and their total premium exceeds Rs 2.5 lakh, the payout from both will be taxable

·       Ulips purchased before February 1, 2021, remain exempt from tax provided their sum assured is equal to or more than 10 times the annual premium