For the generation of insurance seekers who thrived on insurance policies with assured returns issued by a single public sector enterprise, unit-linked insurance plans (ULIPs) are a revelation. Traditionally insurance products have been associated with attractive returns coupled with tax benefits.
The returns part was often so compelling that insurance products competed with investment products for a place in the investor's portfolio. Perhaps insurance policies then were symbolic of the times when high interest rates and the absence of a rational risk-return trade-off were the norms.
The subsequent softening of interest rates introduced a degree a much-needed rationality to insurance products like endowment plans; attractive returns at low risk became a thing of the past. The same period also coincided with an upturn in equity markets and the emergence of a new breed of market-linked insurance products like ULIPs.
While in conventional insurance products the insurance component takes precedence over the savings component, the opposite holds true for ULIPs.
More importantly ULIPs (powered by the presence of a large number of variants) offer investors the opportunity to select a product which matches their risk profile; for example an individual with a high risk appetite can shun traditional endowment plans (which invest about 85% of their funds in the debt instruments) in favour of a ULIP which invests its entire corpus in equities.
Here are answers to some commonly asked questions about ULIPs:
What is the commission paid to life insurance agents on ULIPs; upfront as well as ongoing?
The commission structure differs across various life insurance companies. However, broadly speaking, first year commissions are in the 7%-20% range while ongoing commissions are in the 1%-5% range.
What do individuals actually receive on maturity at the end of the tenure in ULIPs? Do companies factor expenses into the maturity in 'benefit illustrations'?
The maturity amount as shown in the benefit illustrations of companies is what individuals usually receive at the end of the policy tenure. However, some companies may not factor in the fund management charges into the maturity amount while some others do. Individuals need to ask their insurance advisor/agent about the same.
Are expenses clearly displayed on insurance companies' Web sites/sales literature?
The expenses are clearly displayed on most company web sites as well as sales literature.
Are tax benefits available on ULIPs?
Tax benefits under Section 80C and Section 10 (10D) are available for ULIPs. These are the same as those for regular life insurance plans.
Are top-up amounts (premium and maturity amounts) eligible for tax benefits under Section 80C and Section 10 (10D)? Are partial/full withdrawals taxable?
We have failed to come out with a unanimous view on this topic despite interactions with various life insurance companies.
Is it mandatory for insurance companies to disclose their ULIP portfolios at regular time intervals?
There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so. Also experience suggests that some insurance companies declare their portfolios on a monthly/quarterly basis on their Web sites while others fail to do so.
Has IRDA placed any caps/upper limits on the expenses which insurance companies can charge on their ULIP offerings?
No, IRDA has not placed any restrictions on the expenses that can be charged by insurance companies on their ULIP offerings.
Are there any investment norms imposed by IRDA on ULIPs?
Our interactions with insurers indicate that ULIPs have a relatively free hand in making investments. IRDA has not imposed any norms.Get started with your retirement planning. Click here!
ULIPs & You - Get the latest issue of Money Simplified today! Click here!