The New Ulip is not the Best insurance Product

The new ULIP scheme is an excellent product provided insured have a goal or objectives in front of him . The new ULIP could be a sought after product for Children’s education, marriage of daughter or to create wealth for initial down payment for home loan. It is neither a pure investment nor a pure insurance product worthy for middle class. Many readers of AT asked whether it would be prudent to buy new ULIP product for the sake of insurance or investment. My views are loud and clear. It is a good product with an objective or goal in mind for the wellbeing of the family. It is neither a cost effective life insurance product nor an efficient investment product, unless continued for long term. It has 80 c tax benefits for the insured. But it has yet to receive tax free status under section 10d of finance Act.

The Unit linked Insurance Plan(ULIP) is a type of life insurance product under IRDA having an investment overtone.. The cash value of a policy varies according to the current net asset value of the underlying investment assets. It allows protection and flexibility in investment, which are not present in other types of life insurance such as whole life policies. The premium paid is used to purchase units in investment assets chosen by the policyholder.

ULIP came into play in the 1960s and is popular in many countries in the world. Now in India once ULIP is taken cannot be surrender till fifth year of subscription is over. ULIP once subscribed must be maintained till full policy term in order to gain benefit.

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In India investments in ULIP are covered under Section 80C of IT Act. However, the concept of having an investment and insurance by the same instrument was challenged by the market regulator SEBI which took up the matter to the Supreme court of India .The Indian government brought down curtains on the two-month long tussle between the regulators by ruling that Unit-linked Insurance Products (Ulips) will be governed by the IRDA

If you use life insurance as an investment instrument, be prepared for slightly lower yields because of increased taxation. The ULIP product is not tax efficient despite it provides 80 C benefit. The service tax on ULIP is now 1.5 percent against 1% on Life insurance.

For example, if you paid an annual premium of Rs 10,000, the service tax (of 10 per cent) was charged on Rs 100. Now, the tax will be charged on Rs 150. “These will be adjusted in the premiums and accordingly the yield will fall,” said a senior official of a life insurance company.

Similarly, the finance minister has also brought all unit-linked insurance plan (Ulip) charges under the gamut of service tax. Until now, only mortality and fund management charges were subjected to service tax. This means, policy administration charge and policy allocation charge, too, would come under the service tax net. According to Nageswara Rao, CEO and managing director, IDBI Federal Life Insurance Company, guaranteed Ulips would attract higher charges, too, after the Budget modification in the service tax.

However, the insurers were waiting for the finance minister to clarify on the continuation of the exempt-exempt-exempt (EEE) tax regime on life insurance products once the Direct Tax Code is implemented from April 1, 2012. “EEE is an important incentive to invest in long-term savings instruments such as life insurance and hence should be retained. However, the speech did not give any clear indication on it,” , commented by an insurance expert.

In the new guidelines, which took effect from September 1, Irda increased the lock-in period for Ulips from the existing three years to five years. And, all Ulips other than pension and annuity products were to provide a minimum mortality cover or health cover. This has resulted in a sharp drop in sales of Ulips, which once had constituted more than 90 per cent of the sales of life insurance companies.

“All products under the new guidelines have been performing very well and this shows if a proper product can be developed, sales will not be an issue,” said an LIC official.Private life insurance companies, on the other hand, have seen sluggish growth in the financial year so far. In the first 10 months, they collected Rs27,865 crore by selling new policies, a modest 5.8 per cent increase as against Rs26,328 crore collected a year before.

Why ULIP plans are avoided now a day by most people? This is due to the fact that in earlier regime most ULIP plans were improperly sold. The insurance officials did hide the fact that it is a long term product and would not yield any profit for at least for seven years, though product could be exited after three years. Many insurance agents sold the product on the basis one time payment . Agents also never clearly mentioned that if policy is exited before seven years a penalty would be charged as the surrender value. If the insurance companies would have trained their agents properly this kind of miss information would not have occurred. Instead of imparting proper training to their agents, insurance companies pressurised their agents to achieve higher target every months. This was done for ULIPS were the bread and butter for insurance companies then. Difference between two regulators forced the government to recast the ULIP. The product is of great value now provided it is understood properly. The ULIP could be bought by young parents while they are in their late Thirties. This would provide them with great satisfaction while sending their children for higher education and during marriage.


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