8/20/2015

WhyyoushouldinvestinUlipsnowTheTimesofIndia

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NarendraNathan|Oct6,2014,07.04AMIST

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RecentlylaunchedUlipshaveverylowcharges.Findoutwhyyoushouldbuytheseinsurancecuminvestment
plansnow
Theywereoncethemostboughtfinancialproduct.ThenUlipsbecamethemostreviledinvestment,forcinga
stringofreformatorymeasures.Nowtheseinvestmentcuminsuranceplanshavechangedonceagaintobecome
alowcostinvestmentoption.Infact,someoftheUlipsintroducedinrecentmonthsarecheaperthanthedirect
plansofmutualfunds.
Wewon'tbesurprisedifthisevokesanangryresponsefromreaders.Ulipbecameafourletterwordduetothe
highchargesleviedbyinsurancecompaniesandrampantmissellingbydistributors.Insomecases,thecharges
wereashighas80%ofthefirstyear'spremium.Distributorsluredgullibleinvestorsbynotrevealingthehigh
chargesandshowcasingonlythereturnsofferedbythemarketlinkedproduct.
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TheInsuranceRegulatoryandDevelopmentAuthority(Irda)clampeddownin2010,cappingtheannualisedchargesofUlipsat2.25%forthefirst
10yearsofholding.Thechargeswerefixedatthisratebecauseitwastheaveragecostchargedbycompetingproductssuchasmutualfunds.With
noincentiveleftfordistributors,Ulipsalesplunged.
Inrecentmonths,insurancecompanieshavesweetenedthedealforinvestorsbyreducingthechargesevenfurther.TheBajajAllianzFutureGain
plandoesnotlevypremiumallocationchargesiftheannualinvestmentisRs2lakhandabove.TheEdelweissTokioWealthAccumulationPlan
doesn'thavepolicyadministrationcharges.SomeUlips,suchasAvivaiGrowthandICICIPrudentialEliteLifeII,don'thavelowerchargesbut
compensatelongterminvestorswith'loyaltyadditions'.
ButtheClick2InvestplanfromHDFCLifeisagamechanger.Theonlychargeitleviesisanannualfundmanagementfeeof1.35%ofthecorpus
value.Thereisalsoamortalitychargebutthatisforthelifecoverofferedtothepolicyholder.ThelowchargesmaketheClick2investplancheaper
thaneventhedirectplanofadiversifiedequityfund.Forinstance,thedirectplanofthelargestequityscheme,HDFCEquityFund,chargesan
expenseratioof1.5%peryear.
Somereadersmaypoohpoohtheideaofsavingasliveroncosts.Afterall,a0.15%savingoncostsmakesadifferenceofonly`150onan
investmentofRs1lakh.Whilethismayseemsmall,thedifferenceinthecostcanballoonintosubstantialsavingsinthelongterm.
ShedyouraversiontoUlips
ThistransformationofUlipsfromacostlybundledproducttoalowcostoptionhasledtoachangeofheartamongfinancialplannersaswell.For
long,theyhaveadvisedclientstokeepinsuranceandinvestmentseparate.SaysSSridharan,headoffinancialplanning,FundsIndia.com."Low
costproductslikethiswillbesuitableforinvestorswhowanttocombineinsurancewithinvestments,"headds.
He'snotalone.WithmorelowcostUlipsontheanvil(atleasttwocompaniesareawaitingIrda'sapprovalfortheirlowcostUlips),manyfinancial
plannersarechangingtheirtune."TheClick2InvestplanfromHDFCLifeisagoodproduct.Wearerecommendingittoourclients,"saysJaya
NagarmatfromInvestorShoppe.TanvirAlam,founder&CEOofFincartgoesastepfurther."ThisUlipwillgivethemutualfundindustryarun
foritsmoney,"hesays.
Indeed,itistimetogetridofthehistoricalaversiontoUlipsandlookatthemthroughtheprismoflowercharges.Thiswillnotbeeasybecausea
lotofinvestorshavebeenscarredbytheirexperiencewithUlips.Manyhavelostously,themortalitychargesarehigherwhenitcomestosuch
plans.

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ThoughUlipsofferacovertopolicyholders,thebenefitmaybeadragforthosewhoareinterestedpurelyininvestment.ThelowcostUlipsare,
therefore,TypeIplansthatwillpayeitherthefundvalueorthesumassured.Here'showitwillwork.SupposeapersonbuysaUlipwithaRs1
lakhpremiumfor20years.TheplanwillgivehimacoverofRs10lakh(10timestheannualpremium),buttheinsurancecompanywillcharge
mortalitypremiumforonlyRs9lakhsincethetotalriskforthecompanyisRs9lakh.Witheveryannualpaymentofthepremium,theriskofthe
companywillcomedown,reducingthemortalitycharge.WhenthefundvalueoftheUlipexceedsthesumassured,theplanwillstopdeducting
mortalitychargesandtheentirepremiumwillgointoinvestment.
Anotherwaytoreducetheimpactofmortalitychargesistobuythepolicyinthenameofyourspouseorchild.Incomefrominvestmentsmadein
thenameofaspouseorachildaresubjecttoclubbingprovisions,butsincethematurityproceedsfromUlipsaretaxfree,youdon'thavetoworry
aboutthat.YoucanalsogoforsinglepremiumUlips,withaninsurancecoverofonly1.25timesthepremium.However,thematurityproceedsof
suchaplanwillnotbecoveredunderSection10(10D)andwillbetaxableinyourhand.
moneyduetothedoublespeakofdistributorsandthefailure(orunwillingness)ofinsurancecompaniestoredresstheirgrievances.Policyholders
lostmoneyeventhoughthemarketswereshootingup.Buyersdidn'trealisethateventhoughtheirfundswentupby1520%inayear,theywere
sufferinglossesbecauseonly4050%oftheirmoneywasactuallyinvestedinthefirst23years."ThenewUlipsarefacingthebaggageofoldUlips,"
saysYashishDahiya,CEOandcofounderPolicybazaar.com.
Thetaxadvantage

WhilethelowchargesofnewUlipsmakethemattractive,themainadvantageistheseamlessandtaxefficienttransferfromdebttoequity,and
viceversa.Thisswitchingmaybeforvariedreasons,includingrebalancingtheportfoliooreventimingthemarketsbysavvyinvestors.
"Thoughretailinvestorsmaynothavethebandwidthtoswitchonthebasisofmarketviews,peoplewhoareawarecanmakeuseofthisfacilityvery
effectively,"saysAlam.ItisimportanttonotethatUlipisnotjustaboutequities.Smartinvestorscanalsomovewithindebt,shiftingtolong
durationfundswheninterestratesareexpectedtogodownandmovingtoshorttermfundswhenratesareontherise.Ifmutualfundinvestorsdo
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this,theywillhavetopaytaxontheshorttermandlongtermcapitalgainsmadeonthefund.SinceUlipsareinsuranceplans,thegainsand
maturityproceedsaretaxfreeunderSection10(10d).
However,thesumassuredmustbeatleast10timestheannualpremiumforthistaxbenefit.Thisyear'sbudgethaschangedtaxrulesfordebt
funds.Theminimumholdingperiodhasbeenincreasedfromoneyeartothreeyears.Debtfundinvestorswillhavetopayhighertaxifthey
rebalancebyshiftingoutofdebtwithinthreeyearsofinvesting.However,therewillbenotaxincaseofUlips.Investorsshouldnotethatinsurance
companiesallowonlyalimitednumberoffreeswitches.WhilesomeUlipsallowunlimitedfreeswitches,otherspermitonly412freeswitchesina
year.ThereisaRs100250chargeforeveryswitchbeyondthefreelimit.Likebanks,insurancecompaniesalsochargeyoulessifyoudothe
transactiononline.Forexample,HDFCClick2investchargesRs250peradditionalswitchifdoneofflineandonlyRs25ifthesameisexecuted
online.
Decodingthecharges
ThechargestructureofUlipsisnotasstraightforwardasthatofmutualfunds.Thereisapremiumallocationcharge,apolicyadministration
chargeandafundmanagementcharge.Thereisalsothemortalitychargeforthelifecoverofferedbytheplan.The2010Irdaguidelinessaythat
thecombinedchargecannotbemorethan2.25%ayearinthefirst10years.Theyhavealsocappedthefundmanagementfeeat1.35%perannum,
thoughmanyUlipsarecharginglessthanthatontheirshorttermdebtschemes.
ThemortalitychargediffersacrossUlips.Someplansoffereitherthesumassuredorthefundvalueondeath.TheseareTypeIUlipsandtheir
mortalitychargesgodownasthefundvaluegoesup.TheTypeIIUlipsofferboth,thefundvalueaswellasthesumassured.Obviously,the
mortalitychargesarehigherwhenitcomestosuchplans.
ThoughUlipsofferacovertopolicyholders,thebenefitmaybeadragforthosewhoareinterestedpurelyininvestment.ThelowcostUlipsare,
therefore,TypeIplansthatwillpayeitherthefundvalueorthesumassured.Here'showitwillwork.SupposeapersonbuysaUlipwithaRs1
lakhpremiumfor20years.TheplanwillgivehimacoverofRs10lakh(10timestheannualpremium),buttheinsurancecompanywillcharge
mortalitypremiumforonlyRs9lakhsincethetotalriskforthecompanyisRs9lakh.Witheveryannualpaymentofthepremium,theriskofthe
companywillcomedown,reducingthemortalitycharge.WhenthefundvalueoftheUlipexceedsthesumassured,theplanwillstopdeducting
mortalitychargesandtheentirepremiumwillgointoinvestment.
Anotherwaytoreducetheimpactofmortalitychargesistobuythepolicyinthenameofyourspouseorchild.Incomefrominvestmentsmadein
thenameofaspouseorachildaresubjecttoclubbingprovisions,butsincethematurityproceedsfromUlipsaretaxfree,youdon'thavetoworry
aboutthat.YoucanalsogoforsinglepremiumUlips,withaninsurancecoverofonly1.25timesthepremium.However,thematurityproceedsof
suchaplanwillnotbecoveredunderSection10(10D)andwillbetaxableinyourhand.
BeforeyoubuyaUliptakethisshorttesttoknowifyoushouldbuysuchaplan
Youalreadyhaveadequatelifecover
Youtypicallyneedaninsurancecoverof56timesyourannualincome.ThisentireinsuranceneedmaynotcomefromaUlip,sobuyatermcover
beforeyouconsiderbuyingaUlip.
YouunderstandthatUlipsaremarketlinkedproducts
Likemutualfunds,Ulipsalsoinvestinthemarkets.Bepreparedforthemarketriskthattheinvestmentwillbeexposedto.Notonlyequityfunds
butevendebtfundscandeclineinvalue.
Youknowthatexitingin56yearswillnotyielddesiredresults
Ulipsweremissoldasinvestmentsyoucanexitwithinthreeyears.Thelockinperiodhasbeenextendedto5yearsbuttogetthebestoutofthe
Ulip,youneedtoholditforatleast1215years.
Youknowhowtousetheswitchingfacility
TheswitchingfacilityofaUlipisakeyfeaturethatdifferentiatesitfromamutualfund.Youcanshiftmoneyfromdebttoequity,andviceversa,
dependingonyourreadingofthemarket.
Youcanaffordtopaythepremiumfortheentireterm
Asmentionedearlier,itisimportanttocontinueinvestinginaUlipthroughthetermoftheplan.Buyapolicythatyoucancontinueforthefull
termwithoutimpingingonotherfinancialgoals.
Youknowthetaxrulesrelatingtotheplan
Ifthelifecoverisnot10timestheannualpremium,youwon'tgetanytaxdeductionandthecorpuswillalsobetaxableonmaturity.Also,the
deductionunderSec80CiscappedatRs1.5lakh.
StayupdatedonthegowithTimesofIndiaNewsApp.Clickheretodownloaditforyourdevice.

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