How Fourth-Generation ULIPs Are Changing Life Insurance

How does ULIP work?
 

When you invest in ULIP, you pay a premium to the company offering you the life insurance cover. A portion of this premium paid by you will be facilitated towards investment, i.e, shares or bonds. The policyholder  does not have to personally manage the funds as insurance companies have fund managers to track them. The policyholder , however, has the choice to view the portfolio and change between debt and equity when they wish to^[1].
 

What are the types of funds offered by ULIPs?
 

Insurance companies offer a variety of funds under ULIPs to meet different investment objectives of the policyholder. The funds offered have different risk profiles and investment time horizon. They also come with distinct potential for returns subject to market risks. One of the funds is equity stocks where the money is invested in company stocks with the intention of capital appreciation. If you are looking for a fund that falls under medium risk, then ULIPs also invest in government securities, corporate bonds and fixed income instruments. Unit Linked Insurance Plan also open the door for  hybrid funds which allow the policyholder to have a mix of equity and debt options in their portfolio.

ULIPs allows policyholder’s to invest  in  either equity funds, which invests particularly in equity specific assets such as company stocks or debt funds such as bonds or government securities or a  mixture of both that is hybrid funds^[2].
 

What are 4G or New Age ULIPs?
 

When compared to traditional ULIPs, 4G ULIPs or New-Age ULIPs offer more features. 4G ULIPs are an evolved form of ULIP that offer more benefits and additional features as compared to traditional ULIPs. These new policies mark a major advancement in the life insurance industry. Fourth-generation ULIPs build upon the advantages of earlier plans while adding innovative features that reshape the way policyholders view both investments and insurance. Role of ULIPs in changing the life insurance, can be attributed to their cost effectiveness and latest features.
 

Why Are Investors Flocking To New Age ULIPS?
 

Less expensive
 

The rebranded version of ULIPs have directly addressed the feedback on being expensive financial products. In 4G ULIPs, a lot of costs are reduced including allocation and mortality charges^[4].
 

The burden of tax
 

Another high point of these enhanced products is the tax-saving ability. New-age ULIPS are able to garner decent tax savings. Investment in this product is tax free up to Rs 1.5 lakh under section 80C of the Income Tax Act (in case of old tax regime)^[5].
 

Who should invest in ULIPs?
 

For those that dream on a broader horizon, plan for the future, and wish to ensure risk cover for their family, ULIPs can be the viable choice^[3]. You also have the option of buying ULIPs online from the comfort of your home and also reduce charges. However before buying a ULIP you must ensure that you have read and understood all terms and conditions. This plan will give you both life insurance and market-linked investment returns for a longer period. You should also note that ULIPs have investments subject to market risks , all the investment in ULIP is borne by the investor.
 

FAQs
 

01. What are the risks associated with ULIPs?

Since a part of the premium goes into investment such as equity or debt, it comes with stock market risk factors. The risk entirely depends on the investment funds that are chosen by the investor and how they perform. Also, you must note that ULIPs have a lock-in period of five years, which means withdrawals can only be made after the lock-in period ends^[6].
 

02. Can you change funds during ULIP tenure?
 

Yes, you can switch between equity and debt in your portfolio between the tenure of your plan. You can choose to do this based on your risk appetite and your understanding of the stock market movement. However, you can make a few switches only without attracting a switching cost^[1].
 

03. What happens in case of the death of a ULIP life assured?
 

In case of the death of the policyholder before the maturity of the plan, the proceedings will be given to the nominees. You can avail between two types of ULIPs- Type I will give a higher payout to the nominee in case of death while Type II will provide assured sum value as well as fund value to the nominee^[1].
 

04. What is the lock in period of ULIPs?
 

ULIPs Unit Linked Insurance Plan are designed for investors who are determined on keeping money safe for the future. This is why the plan has a 5-year lock in period where the policyholder cannot withdraw funds until the maturity of the plan^[2].
 

05. Who benefits from ULIPs?
 

A need for life insurance, a long-term financial goal and a risk appetite is the kind of investor who benefits from ULIPs. Since there is life insurance and market-linked investment in the same offer, it meets the objective of family’s financial security as well as a wealth creation. This type of plan also helps in meeting long-term targets rather than spending it on short-term gains.
 

07. How do ULIPs stack up against Mutual Funds?
 

The prominent focus of Mutual Funds is wealth creation or regular income. They do not offer life insurance along with investments like ULIPs. There is also no lock-in period in Mutual Funds and you can start investing with Rs 500. As for ULIPs, the amount is paid as premium and hence, the minimum investment is on the higher side^[7].
 

08. Which is better ULIP or SIP?
 

Systematic investment plan help you invest in mutual funds or ELSS (Equity-linked Savings Scheme). SIPs allow you to grow your wealth over a long period of time. In case of ULIPs you have a dual benefit as they come with life insurance as well investment benefits.
 

09. Is NPS better than ULIP?
 

You need to analyse your financial goals and view things accordingly. NPS will give you retirement savings and tax benefits. On the other hand, along with tax benefits, ULIPs offer life insurance along with an added advantage of investment.
 

10. Will I end up losing money with ULIP?
 

ULIPs are life insurance plans that come with an investment component , the investment is subject to market  risk and  comes with various investment options. There are set of investments that are managed by the insurance company and you can invest in them. The future of these investments depends on stock market performance, and it is difficult to predict the future of the stock market.