Did you know that Ulips – unit-liked insurance plans were first introduced in 2001? A life insurance plan saves tax and gives tax-free returns in addition to providing financial protection to the family in the case of death of the policyholder during the policy term. If it is a unit-linked insurance plan, the tax-free return just gets bigger.
Interest of Insurers
- Cost of insurance of Ulips less than 0.5% of premium paid. 85% of the charges deducted from Ulip premium are used towards payment to agents, marketing expenses and generating surpluses for shareholders of the insurance company.
- 10% of surplus generated under a traditional with-profit plan goes to shareholders but in case of Ulips the entire surplus is their profit.
- Ulips are more capital efficient than traditional plans as less capital is needed to sell them.
IT was designed by insurers to escalate their profits thus they sold it aggressively through agents (who in turn would earn huge commission with its sale).
Feature: Withdrawal facility
Ulips with the market linkage or higher returns plus insurance cover have another hot feature. Ulips popularity over traditional products goes to the partial withdrawal option after the first three years. Since withdrawals from life insurance plans are tax-exempt in the hands of the policyholder, it attracted investors who put their money in single-premium policies for five years, took the tax benefit on premium payment and after three years started withdrawing their investments without paying any tax thereon. Thus it targeted high income tax payers.
The total cost in a single-premium Ulip is lower than in a regular premium policy. A lower cost means a higher return and that was the pull for single-premium Ulips.
But these are bound to change now though not if it is bought before 1st July. The insurance regulator has increased the lock-in period for Ulips to five years from three years with effect from July. This means that Ulip bought on or after 1st July, 2010, will not have the facility to withdraw investment, even partially, before five years.
The new guidelines on Ulips will make it a better product for the prospective investors. Like every cloud has a silver lining so will the controversial cloud over Ulips make it an improved product between Sebi, Irda and the Government.
Till this matter is settled a prospective policyholder is free to ask his/her agent to reveal their commission earned from the sale of that Ulip. This is because the insurance regulator has directed insurers to disclose their agency commission in the policy document for investor satisfaction (as commission was included in premium paid).
Now policy buyer will know the agent’s commission from the premium he/she paid thus he/she will make an extra effort to enquire about the policy – its cost-benefit and other policies etc.
Jaago Grahak Jaago…
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