Gone are those days when insurance was all about life cover. While life cover is still the primary purpose of buying life insurance, people want more. Instead of locking their money in life insurance with no returns, individuals are looking for products that can provide life cover and generate funds too. Locking funds in investments and life cover separately is difficult for most people in the country because of their financial commitments. Instead, a product like Unit-Linked Insurance Plan (ULIP) is a preferred choice as it provides life cover and has components of investment too.
Meaning of ULIP
A ULIP is a dual product providing life cover and returns on investment. When you buy a ULIP plan, like any other life insurance, you pay premiums. The company divides the premiums that you pay into two halves. They use half of your premium amount towards providing you with a life cover while they invest the other half in funds of your choice. The life insurance part of a ULIP works like any other insurance. If you, as a policyholder, lose your life, your nominee will receive the sum assured. When it comes to the investment component, you choose the funds you want to put your money into. You can choose between debt, equity, and balance funds, depending upon your risk appetite. People who can take risks invest in equity funds as they have high returns. While individuals who prefer safer investments chose debt funds for comparatively lower returns. You can also choose balance funds, where the company invests half of your money in debt funds and the other half in equity funds.
Evolution of ULIPs
The insurance industry has witnessed an evolution over the last few years. Along with traditional insurances, now there are several types of ULIP and other insurances catering to the needs of different consumers. Over the past decade, ULIP benefits have grown tremendously, and it has grown as a financial product. Here is a decade’s timeline of a ULIP and the major changes it underwent-
Before the year 2010
ULIP was not a beloved product when it was initially launched. In the beginning, buying a ULIP was quite expensive, because of expensive front load costs and several other charges. Also, ULIP was wrongly marketed widely as a three-year savings plan. Misinformation and uninformed customers lead to little no interest for the product. People who invested in or considered investing in a ULIP plan realized that the new fund value is quite low, considering additional charges.
Between the years 2010 to 2015
Insurance Regulatory and Development Authority of India (IRDAI) found that there is a huge amount of misinformation regarding ULIP in the country and they are being mis-sold. They imposed guidelines regarding ULIP to provide clarity to policyholders. The guidelines included rules that would lead to policyholders getting better returns on their investment. In September 2010, they limited several charges of a ULIP product. They also established a five-year lock-in period. Also, a compulsory minimum protection cover was raised to ten times the annual premium paid.
From the year 2015
In 2015, the charges that were the major setback of a ULIP, underwent several significant changes. Insurance companies established a max cap on the charges of ULIP, like mortality charges and fund management charges. This was done to increase the popularity of the product and generate more sales.
As of today
When ULIP was launched, several setbacks led to a rocky start. However, things have changed completely now and ULIP has become one of the most popular products, with different types of ULIP gaining popularity among different people. It is popular amongst policyholders for creating wealth in the long run. With years of modification, the product, instead of being expensive, now has become cost-efficient. Also, awareness of ULIP amongst policyholders has increased.
ULIP has evolved over the years and so has the financial literacy of the country. Individuals who are looking for a life cover along with an investment component choose a ULIP over other types of insurance. ULIP benefits include tax exemptions, as the premiums you pay are tax-free. Also, the sum assured that you receive from your ULIP is free from taxes.