ULIP INSURANCE

The New ULIP Vs. The New

Mutual Fund

The Unit Linked Investment Plan (ULIP) v/s Mutual Fund debate is in the eye

of the storm yet again. Everything that can be said already has been said.

However, the rules or both the investment avenues have changed recently.

Many of the changes directly affect the returns of the investor. Hence it is

worthwhile to revisit the old debate for a fresh reassessment of the two

investments and to understand as to which makes for a better investment.

Sales people who are hard selling a financial product will often tell you that

ULIPs Insurance are the same as mutual funds except that they also insure

you. While there are some superficial similarities between the two, the

products are very distinct from each other. An investor should not go by the

sales pitch but understand the differences to make the right investment choice.

Introduction

The purpose

The primary raison d'etre of ULIPs is life insurance. The recent turf war between

Insurance Regulatory and Development Authority (IRDA) and Securities and

Exchange Board of India (SEBI) ended when the courts decreed that IRDA will

keep control over ULIPs, reinforcing that it is an insurance product.

Till now we had ULIPs minus any insurance cover. However, now it has been

made mandatory for all ULIPs to provide at least mortality cover or health cover

except for pension and annuity products. IRDA circular states that at any given

time the annual health cover should not be less than 105% of the entire

premiums paid. Investments with insurance provide a value added product for

customers, whereas, mutual funds are primarily investment vehicles.

ReturnsMutual Funds, which depend on the stock market, do not offer any guaranteed

returns. With the changed regulation, every ULIP pension or annuity product

must present a minimum guaranteed return of 4.5 % per year or as mentioned

by IRDA periodically on the date of maturation. Other ULIP products still do not

offer guaranteed returns.

Mutual funds are essentially short to medium term products (6 months upto 3

years or more). The liquidity that these products offer is valuable for investors.

Equity Linked Saving Scheme (ELSS) are the only ULIP with a 3-year lock in.

ULIPs, in contrast, are positioned as long-term products. IRDA has increased the

lock in period of ULIPs. As per the new Insurance Regulatory and Development

Authority (IRDA) guidelines, insurers will now have to increase the lock-in period

for ULIPs from three to five years which means that during this period there would

be no residuary payments on lapsed, surrendered or discontinued policies - and

agent commission will be spread out. A top-up on insurance premiums will now be

treated as a single premium, meaning that every top-up that one makes will have

to have an additional insurance cover backing it up as well.

Investment horizon

Expenses

In mutual fund investments, expenses charged for various activities like fund

management, sales and marketing, administration among others are subject to

some upper limits prescribed by the Securities and Exchange Board of India

(SEBI). For example equity-oriented funds can charge their investors a maximum

of 2.5% per annum on a recurring basis for all their expenses. All front end

charges, which were used as commissions for the brokers, have been removed in

Mutual Funds, ensuring that the money you invest goes directly towards churning

out returns.

Insurance companies have had a free hand in levying expenses on their ULIP

products in the past with no upper limits prescribed by the regulator, i.e. the IRDA.

Each insurer structures their cost level as well as structure independently. Some

insurers recover most of the cost in the first three premium payments, while some

spread the costs over a longer period.

Under the new regulations, the maximum charge on a Ulip can be 4% (compared

with 2.5% in a mutual fund) at the end of the fifth year, which makes it difficult for

the insurance company to load costs in the first few years as is done now. This will

cut down the huge brokerages earned by insurance agents and will hopefully

provide the investor more transparency

Tax benefits

Till now, ULIP investments qualified for deductions under Section 80C of the

Income Tax Act. Maturity proceeds from ULIPs are tax free.

On the other hand with mutual funds, only investments in equity-linked savings

schemes (ELSS) are eligible for Section 80C benefits. In case of equity-oriented

funds if the investments are held for a period over 12 months, the gains are tax

free; conversely investments sold within a 12-month period attract short-term

capital gains tax @ 10%.

Similarly, debt-oriented funds attract long-term capital gains tax @ 10%, while a

short-term capital gain is taxed at the investor's marginal tax rate.

According to the revised draft of the direct taxes code, policies with sum assured

of more than 20 times the annualised premium will get the benefits of EEE

(exempt-exempt-exempt) taxation rules. So, what happens to the schemes with

sum assured of less that 20 times the annual premium - like most ULIPs?

All other products including Mutual funds will be taxed at the marginal tax rate. If

you are in a tax bracket of 30% then your short term capital gains will be taxed at

30% whether it is invested in Mutual Funds or ULIPs with a lower than 20 times

cover.

Transparency

Mutual funds have always been more transparent than ULIPs Insurance as far as

charges go. Mutual fund investors can now choose to have their holdings in

dematerialized form, with National Security Depository Ltd (NSDL) announcing that

it will enable the same for its demit holders. This is good news for MF investors, as

it will help them centralize all their investment holdings.

A demit account will allow the investors to view their investments as a single

snapshot. This is any day an advantage over calculating their holdings via going

through several statements. However, ULIPs do remain opaque and complex with

regards to their charges.

Source:http://bit.ly/2c3PV1y

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