Unit Linked Insurance Plans (ULIP)

Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk protection and
flexibility in investment. The investment is denoted as units and is represented by the value that it has
attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the
underlying assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk
cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a
Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy.

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors have
the option of investing across various schemes, i.e, diversified equity funds, balanced funds, debt funds etc.
It is important to remember that in a ULIP, the investment risk is generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium
payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter the
premium amounts during the policy's tenure. For example, if an individual has surplus funds, he can
enhance the contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option of
paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). ULIP investors
can shift their investments across various plans/asset classes (diversified equity funds, balanced funds, debt
funds) either at a nominal or no cost.

Expenses Charged in a ULIP

Premium Allocation Charge:

A percentage of the premium is appropriated towards charges initial and renewal expenses apart from
commission expenses before allocating the units under the policy.

Mortality Charges:
These are charges for the cost of insurance coverage and depend on number of factors such as age,
amount of coverage, state of health etc.

Fund Management Fees:

Fees levied for management of the fund and is deducted before arriving at the NAV.

Administration Charges:
This is the charge for administration of the plan and is levied by cancellation of units.

Surrender Charges:
Deducted for premature partial or full encashment of units.
Fund Switching Charge:
Usually a limited number of fund switches are allowed each year without charge, with subsequent switches,
subject to a charge.

Service Tax Deductions:

Service tax is deducted from the risk portion of the premium

Comparision of ulips vs mfs in India

Below is a brief comparision of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds)
specific to the Indian market.
Primary Objective
MFs : Investments
ULIPs: Protection + Investments
Investment Duration
MFs: Works out for Medium term, Long Term Investors. Risky for Short Term investors.
ULIPs: Works out for Long Term Investors only.
Liquidity
MFs: Very liquid. You can sell your MF units any time(except ELSS). Some MF's like those from
Reliance have introduced redemptions at ATMs.
ULIPs: Limited liquidity. Need to stay invested for the minimum number of years specified
before you can redeem.

Flexibility
MFs: Very flexible. Plenty of scope to correct your mistakes if you made any wrong investment
decisions. You can easily shuffle your portfolio in MFs.
ULIPs: Flexibility is limited to moving across the different funds offered with your policy.
Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to an other
ULIP of a different fund house can be expensive
Investment Objective
MFs: MF's can be used as your vechile for investments to achive different objectives.(Eg:
Buying a car three years from now. Downpayment for a home five years from now. Childrens
education 10 years from now. Childrens marriage 15 years from now. Retirement planning 25
years from now. Medical expenses after retirement 25 years from now)
ULIPs: ULIPs can be used for achieving only long term objectives (Chidrens education,
Childrens marriage, Retirement planning)
Tax Implications
MFs: All investments in MF's don't qualify for section 80C. Only investments in ELSS qualify for
80C.
ULIPs: Provide Tax Benefits under section 80C.
MFs: Returns on equity MF's are exempt from long term capital gains tax. (Unless tax laws
change in the future).
ULIPs: We are moving from EEE to EET. No clarity if ULIPs will be taxed under EET.
MFs: Tax liabilities when moving across from debt to equity funds.(Returns from debt MF's are
taxed.)
ULIPs: Very flexible in moving between equity and debt funds(not tax implications until
maturity of the policy
Strings Attached(fine print)
MFs: None so ever. At most you pay a small exit load if any.
ULIPs: Some strings attached for your policy to be in effect. Minimum number of premiums
need to be paid. Minimum fund balance need to be always maintained. (I personally donot like
policies which say pay three years premium and get insurance cover for the next 25 years
since there are a lot of ifs and butts involved. A lot of assumptions made and nothing is in
your hand, it could turn out your fund balance might be exhausted after just 12 years of
insurance cover).

ADVANTAGES ULIPS

1. Can easily rebalance your risk between equity and debt without any tax implications.
2. Best suited for medium risk taking individuals who wish to invest in equity and debt
funds(atleast 40% or higher exposure to debt).
3. No additional tax burden for those investing mainly in debt unlike in MFs.

ADVANTAGE MFS

1. Better returns than ULIPs.

2. Lower charges than ULIPs.

3. Very flexible and enables you to switch your investments from non
performing MF's to better performing MFs
4. Very Liquid can be redeemed at anytime.
5. Best suited for medium to high risk taking individuals who wish to invest a
significant portion in equity funds(atleast 65% exposure in equities).