The long-standing ULIP vs ELSS debate got fresh stoke to fire with the introduction of Long Term Capital Gains (LTCG) tax on the sale of equity shares and equity oriented mutual funds. A great tool for wealth creation with the benefit of protection, ULIPs helps you achieve your life’s important goals like retirement and children’s education - with the comfort of having protection in-built in the product design. Added to this, ULIPs offer flexibility to structure the debt-equity ratio of the investment through policy, and the options to revisit this structure as the policyholder’s life evolves. Combine the benefit of protection, flexibility to structure the policy portfolio, with the LTCG exemption for ULIPs and it is evident why ULIPs are generating more excitement than ever before. While this combination is potent in itself, ULIPs have also benefited from broader changes in the industry. From 2010 onward, ULIPs have seen a consistent decline in premium allocation charges and policy administration charges, bolstering their overall return profile. The introduction of online plans led to a further reduction in cost, helping the product combat its traditional image as a relatively high-cost investment tool.

Low Cost over long term periods

IRDAI regulations in 2010 and 2013 made ULIPs more customer friendly with caps being introduced on overall cost structure and surrender values, which led to lower commissions and fund management charges. Digitalization is helping further reduce charges. New variants known as the “fourth generation ULIPs” - online ULIPs in the market are now available with zero charge structure except fund management charges per annum, which make them even more competitive in terms of costs incurred, compared to equity mutual funds. There is increased flexibility in terms of paying premiums as well. You can pay them at one go, over a limit period (5 years for instance, in a 20 year policy) or over the complete policy tenure. All in all, ULIPs are shrugging off their reputation as investments riddled with a high cost structure, and have become significantly more value for money as compared to a decade ago.

Flexibility of fund allocation leading to better risk-reward balance

ULIPs typically allow you to choose from multiple funds to invest in. Each fund has a different risk-return profile. High growth funds may invest as much as 100% of the corpus in equity markets while conservative funds may invest entirely in government securities, corporate bonds and money market instruments. Younger investors that have the ability to take on more risk can choose higher growth options. As life stages evolve, for instance, the birth of children, investors can opt to move their ULIP investment to a fund that has a more balanced risk-return profile. If you see the equity market sentiment turning negative and wish to temporarily move to the security of government instruments, you have the flexibility to make that switch as well, ensuring that you have peace of mind. Interestingly, many companies offer pre-built structured investment strategies. These may suggest, for instance, that a larger proportion of investments in the initial years are allocated to high growth funds, with a gradual switch towards more conservative funds towards the later part of the investment period. This ensures that you get a life stage appropriate risk-return profile without having to actively move your money around, though you still get the flexibility to do so.

Life Cover providing dual benefits.

Typically, ULIPs are utilised to create a corpus for life stage goals such as retirement or a child’s education or marriage. The life insurance cover they provide ensure that these goals are met even in the case of the family losing its prime earning member. Insurance coverage is primarily what distinguishes ULIPs from ELSS plans, and gives them a definite edge as a financial product for life stage needs.

Tax Friendly Investment

With Budget 2018 making ULIPs exempt from LTCG, they fall under the Exempt, Exempt, Exempt (EEE) tax regime. This allows premiums paid to secure 80C deduction while the capital gain on maturity is exempt as well. In conclusion, their high post tax returns combined with their insurance coverage make ULIPs a critical component of any balanced financial portfolio.