UNIT LINKED INSURANCE PLAN (ULIP)

ULIP stands for Unit Linked Insurance Plans. ULIP is a combination of insurance and investment. Here policyholder can pay a premium monthly or quarterly or annually. A small amount of the premium goes to secure life insurance and rest of the money is invested in any number of qualified investments such as stocks, bonds or mutual funds .

Term:   Policyholder goes on investing through the term of the policy – 5,10 or 15 years upto 30 years and accumulates the units.

Investment option:  ULIP offers investors options that invest in equity and debt.

 An aggressive investor can pick equity oriented fund option whereas a conservative one can go with debt option. 

Returns: The recently launched ULIP are better than the older ULIP due to lower charges. One can pick and choose the low cost ULIP. While traditional insurance plans offer 5% to 6.5% returns, ULIP can offer you double digit returns if you are invested in equity funds and debt fund can also give 7% to 9% returns according to past data.

Lock in Period: 5 Years , even the policy holder surrender the plan after 1 year the invested amount will not be withdrawn before 5 years and the amount will be transferred (after deducting surrender charges) to DP Fund where policy holder’s invested amount will earn 4 % interest per annum.

Deth Benefit:   higher from following:

(a)  Sum assured – Withdrawal (if any)

(b)  Minimum death benefit which is defined in policy (e.g. 105%, 125% etc. of sum assured)

(c)  Fund value.

Maturity Benefit:    Fund value

Balancing option: ULIPS provide Balancing Option i.e. as per your life stage you can reduce your risk level by reducing equity allocation to increasing debt allocation. But it is fully option able to the insurer.

Taxation: No upper limit for investment, but u/s 80c of IT Act, 1969 individual can claim tax exemption up to rs. 1,50,000/-.

Maturity amount is tax free if

Sum assured > 10x annual premium

If your annual premium is more than 1 lakh TDS would be applicable 2% on

Maturity amount.

If individual surrender the plan within lock in period, his/her tax exemption will be withdrawn in the year of surrender. 

HDFC Life is a leading provider of ULIP investments. The firm’s plans offer varying provisions, terms and investment options. Other ULIP providers include Aegon Life, PNB MetLife, Kotak Life, ICICI, IndiaFirst, SBI Life, IDBI Federal and UTI.

RISK FREE INVESTMENT OPTIONS

Before going to build up a smart and strong portfolio discussion, we need to look over various types investment plans. So first of all we discuss various types of investment plans in India and make it understand.

We will discusses Investment option in two format

(a)    RISK FREE INVESTMENT OPTION

(b)   INVESTMENT OPTION SUBJECT TO RISK.

Today we discusses only          

(a)    RISK FREE INVESTMENT OPTION

1.     Recurring Deposit:   It is a type of term deposit which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the prevailing rate.

This facility provided by Banks and Post office.

Interest Rate : generally 6.5% to 7.5 %.

Term:  12 month to 10 years.

2.       Fixed Deposit:   In this scheme a fixed amount of sum is locked for a predetermined period of time and in return which earns fix interest on the locked amount during the locked period of time.

This facility provided by Banks, NBFCs, Post office.

Interest Rate : generally 7% to 8.5 %.

Term:  it varies from 90 days to as per choice how many days any person can fix his/her money.

3.       Public Provident Fund (PPF):  This is also a type of recurring deposit with various terms and regulations imposed by the Government of India.

Term:  15 years

Minimum amount to open : 500/- and maximum no limit.

Person must deposit minimum rs. 500/-  every year. One can deposit with maximum 12 installments in this PPF account.

Partial amount withdrawn from this account is permissible after completion 7.5 years. But without any exceptional cases whole amount withdrawn is not permissible before completion 15 years. It is very well known investment option to individuals.

The amount deposited in a year and interest accrued is permissible for tax deduction u/s 80c of IT Act, 1969 subject to rs. 1,50,000/-.

4.       Due to tax advantage purpose in India there are some kind of Fixed Deposit Scheme is launched with different names. They are below:

(a)    National Saving Certificate (NSC) (Available in Post Office)	in which interest accrued is exempt from tax and lock in period is 5 or 10 years. Interest Rate : 7.1%  (current rate) may be changed by the Government of India.
(b)   Senior Citizen saving Scheme : (Available in Post Office and Banks also)	in which interest accrued is exempt from tax and lock in period is 5 years. But only the person having the age of 60 years and above (55 in case of women) can make this. Interest Rate : 8.5%  (current rate) may be changed by the Government of India
(c)    Kishan Vikash Patra (KVP): (Available in Post Office)	In this scheme amount will be doubled in generally 8.5 years to 9.5 years as per prevailing interest rate. Interest Rate : 7.1%  (current rate) may be changed by the Government of India

N.B:         Now the point is a large group of people take the Life Insurance plans as an Investment option. Because it covers life as well as protect our money and back our given amount with some Bonus, loyalty, and some addition. But we see in our earlier discussion that traditional Life insurance plan is saving plan not an investment plan. The Life insurance plan must also be incorporated in our Portfolio but it will be discussed in our building of portfolio secession.

Now a day in this modern time an Insurance Plan name as Unit Link Insurance Plan (ULIP) has becoming popular which can be taken as a investment option due to its characteristic. The ULIP will be discussed to our next part.

CALCULATION OF RETURNS OF LIC AND MUTUAL FUND WITH COMPARISON

In respect to continue our previous day discussion about                                                                 LIFE INSURANCE VS. MUTUAL FUND, today we make discussion in numeric figures to make understand better:

Let see if a person   aged 25 years and purchase both of Life Insurance Plan and also invest in mutual fund what he will get   

                 LIFE INSURANCE PLAN                                                  MUTUAL  FUND

Here we take life insurance from Life Insurance Corporation of India which is giant company in insurance sector in India. Taking very popular New Endowment plan (814) calculation is here under	In Mutual Fund we will invest in Equity Fund.
Life insurance term: 25 years Annually premium : 6074 +Taxes (calculated by LICI table) Sum assured:   150000/-	We will take the same years and same amount as per life insurance plan for comparison .
Total premium paid :  155411/-                     First year  (6074+273)= 6347/-  second year onward (6074+137)=6211/-                                                                                                                            what we get at maturity after 25 years is: SUM ASSURED:                   1,50,000/- BONUS:                                1,80,000/- F.AB:                                      49,500/- TOTAL                                  3,79,500/- (N.B: All the above calculation taken from LICI table )	Total investment amount during 25 years is (6074/- x 25 years )=          151850/-  In long term we assume 15% rate of return Now by calculating we will gate MATURITY AMOUNT=           14,86,380/- TOTAL DEPOSIT=                     1,51,850/- TOTAL RETURNS=                  13,34,530/-

By calculating above all of us absolutely think that Mutual fund is much better than traditional plan, but wait there are some questions that may arise in our mind, let discuses:

1.       If the person unfortunately died after paying 2 year amount i.e. at the age  27 year old, then what his nominee will get:

In LICI nominee will get full amount of Sum Assured  i.e. 150000/- by paying 2 years premium i.e.                                 (6347/- +6211/-)= 12558/- only.

In Mutual fund no one can determine in short term case due to subject to market risk. So nominee may get below the investment amount.

2.       Tax implication on maturity amount:

The maturity amount is full of tax free. No need to pay any tax on maturity amount.

On maturity one must pay 10% tax on capital gain above rs. 100000/-

So we see that Life insurance plan is very important to protect our valuable life and mutual fund is vital for our wealth creation. So do not confused .

To make our portfolio we should take proper decision that would be discussed in next blog.

Difference between Life Insurance and Mutual Fund

 

        Life Insurance vs. Mutual Funds

Life insurance is designed to provide missing income to your beneficiary upon your death.	Mutual funds are investment vehicles in which money is pooled from a large number of investors and spread over investments like stocks or bonds.
The main purpose of life insurance is to provide financial security for your loved ones upon your death.	It provides a living benefit to bet inflation over a long period of times.
It is a mode of saving in which beat on your life.	It is a process of Wealth creation by parking savings in Mutual funds.
A guaranteed bonus, sum assured will be payable upon maturity of a plan.	Mutual fund is fully subject  to market risk.
In general Life Insurance plan give annually 6% to 7% return due to it is a non risky.	SENSEX and NIFTY provides 17% CAGR from its incorporation. This is much higher than a traditional   life insurance plan.
Insurance sector regulated by                                        “Insurance Regulatory Authority Of India”	Mutual Funds are regulated by  “Stock Exchange Board of India”
Main purpose of  life insurance is to protect some ones valuable life.	Main purpose is investing in equity through professional managers.