The only major expense in new ULIPs is the fund management charge, which is limited to a maximum of 1.35% per annum according to IRDAI. This is close to the expenses of mutual funds. Over the long term (10–15 years), equity-based ULIPs have delivered average returns of 10%–13%, which is much better than the 4–5% returns of traditional insurance plans.

Major Banks in the country have become active in selling Unit Linked Insurance Plans (ULIPs) to their customers. This is primarily due to the declining interest rates on bank fixed deposits. ULIPs offer the potential for better market-linked returns. Banks are positioning them as a comprehensive financial solution, combining both insurance coverage and investment opportunities.

ULIP sales have seen significant growth in recent years. According to insurance industry data, ULIPs now account for over 50% of total premium collections for private life insurance companies, reflecting their growing acceptance in the market.

How different are the new ULIPs from the old ones?
A decade ago, ULIPs had a bad reputation due to high fees, low returns, and complex structures. But the picture has changed. Following stricter regulations from IRDAI, new ULIPs have seen significant improvements:

• Zero Premium Allocation Charge: Now your entire premium is invested.
• Zero Policy Administration Charges: No deduction of administrative expenses.
• Flexibility: Flexibility is the biggest new feature in the new ULIPs. Investors can switch between debt and equity funds without any additional fees, depending on market conditions.
• Variety of Equity Funds: Investors can choose to invest in a variety of equity funds including large cap, mid cap, flexi cap, index funds as per their risk appetite.

The main expense of the new ULIP is the fund management charge, which is limited to a maximum of 1.35% per annum as per IRDAI. This is close to the expenses of mutual funds. Over the long term (10–15 years), equity-based ULIPs have delivered average returns of 10%–13%, which is much better than the 4–5% returns of traditional insurance plans.

What is a ULIP and who is it best for?

A ULIP is a product that combines insurance and investment. A portion of the premium is used for the death benefit and the remaining portion for investment in selected funds. This plan is best for investors who:

• Want to invest long term (10 years or more)
• Want insurance and investments under one roof
• Want to do disciplined savings with market-linked returns

When and who should buy a ULIP?
It's advisable to buy a ULIP if you have at least 10 to 15 years of investment horizon. The benefits of a ULIP are limited in the short term. It can be an effective tool for children's education, retirement planning, or long-term wealth creation. If you already have adequate term insurance and want to invest with additional insurance cover, a ULIP can be a helpful option. However, a term plan is best for primary life insurance. Consider a ULIP as a secondary cover only if it aligns with your long-term investment plan.

How effective is a ULIP in the new tax regime?

Tax benefits on maturity of a ULIP are available under Section 10(10D) of the Income Tax Act, 1961, but it's important to understand:

ULIPs issued after February 1, 2021 (annual premium less than Rs 2.5 lakh): If the annual premium remains less than Rs 2.5 lakh in all the years, the maturity amount will be fully tax-free under Section 10(10D).

• ULIPs issued after February 1, 2021 (annual premium more than ₹2.5 lakh): If the premium exceeds ₹2.5 lakh in any year, the maturity gain becomes taxable. Finance Minister Nirmala Sitharaman clarified in the recent Union Budget that gains from such ULIPs will be treated as long-term capital gains and will be taxed at 12.5%, the same as equity mutual funds.
• The benefit of Section 80C is not available in the new tax regime, hence investors should keep their tax treatment in mind while purchasing ULIP.

Disclaimer: Mutual fund and insurance investments are subject to market risks. Please consult your financial advisor before investing.

 PC: Amar Ujala