Unit linked insurance plans (ULIPs) have had a history of destroying many innocent investors' wealth. Naturally so... they came loaded with exorbitant charges... 30-50% deduction in the first few years was quite common. Moreover, as these were deducted upfront it would have normally taken years before the investment even achieved break-even, forget about the returns.
This fact, however, went unnoticed during 2004-2007. The euphoric boom in the stock markets in a very short time-period ensured that ULIPs delivered great returns despite the steep expenses.
Historic stock market crash of 2008, crashed many dreams. The returns disappeared and the impact of high expenses was evident. Even though the markets did recover later, the pace was relatively steady, which was not sufficient to offset the high initial costs.
The hue and cry that ensued, woke up the regulator. In 2010, IRDA introduced regulations that drastically slashed various expenses levied on the ULIPs.
With no returns to lure the customers and steep cut in their commissions, agents lost all motivation and incentive to sell ULIPs. Consequently the sales of ULIPs have plummeted — from an unprecedented 90%+ policies sold being ULIPs when they enjoyed enormous popularity, nowadays this percentage rarely exceeds single digits.
However, two recent developments bring the spotlight back on ULIPs.
ULIPs launched in the recent months come with very low expenses. In fact, in some cases, they even beat the mutual funds with no upfront deductions and nominal annual charges. As such they make themselves worthy of being considered as a "viable" investment product... a truly unbelievable transformation.
Second is the change in taxation on debt mutual funds. Minimum investment horizon for applicability of long term capital gains tax has been extended from 1 year to 3 years. Also, debt mutual funds have been excluded from the concessional tax of 10% (without indexation). In view of this, the process of re-balancing a mutual fund portfolio becomes somewhat tax-inefficient in the first 3 years. In ULIPs, the switching between debt and equity funds is not taxable. This makes them good for re-balancing, even in the short term.
Also, returns from ULIPs are tax free (if the annual cover is at least 10 times the premium). So
- while equity MFs and equity ULIPs are at par, with long term capital gains being tax-free,
- debt ULIPs are tax-free whereas debt MFs may have to pay normal tax depending on the inflation rate (long term capital gains tax on debt funds is now 20% with indexation benefit).
In addition, with the surrender charges now set at nominal levels subsequent to the regulatory changes, premature closure of policies does not cause any major damage.
In view of the aforesaid developments, you no longer need to fear the ULIPs.
In fact, you can welcome them with open arms... of course, with a few caveats...
... ULIPs have a lock-in of 5 years. So only the long-term funds can be deployed here.
... You have to pay mortality charges. So if you don't need insurance, it is best to stick to MFs
... (And this is important) Mutual Funds are relatively a more standardized products, making it easier to choose the right funds. With ULIPs you need to conduct a much wider and deeper comparison to identify the right ones.
This fact, however, went unnoticed during 2004-2007. The euphoric boom in the stock markets in a very short time-period ensured that ULIPs delivered great returns despite the steep expenses.
Historic stock market crash of 2008, crashed many dreams. The returns disappeared and the impact of high expenses was evident. Even though the markets did recover later, the pace was relatively steady, which was not sufficient to offset the high initial costs.
The hue and cry that ensued, woke up the regulator. In 2010, IRDA introduced regulations that drastically slashed various expenses levied on the ULIPs.
With no returns to lure the customers and steep cut in their commissions, agents lost all motivation and incentive to sell ULIPs. Consequently the sales of ULIPs have plummeted — from an unprecedented 90%+ policies sold being ULIPs when they enjoyed enormous popularity, nowadays this percentage rarely exceeds single digits.
However, two recent developments bring the spotlight back on ULIPs.
ULIPs launched in the recent months come with very low expenses. In fact, in some cases, they even beat the mutual funds with no upfront deductions and nominal annual charges. As such they make themselves worthy of being considered as a "viable" investment product... a truly unbelievable transformation.
Second is the change in taxation on debt mutual funds. Minimum investment horizon for applicability of long term capital gains tax has been extended from 1 year to 3 years. Also, debt mutual funds have been excluded from the concessional tax of 10% (without indexation). In view of this, the process of re-balancing a mutual fund portfolio becomes somewhat tax-inefficient in the first 3 years. In ULIPs, the switching between debt and equity funds is not taxable. This makes them good for re-balancing, even in the short term.
Also, returns from ULIPs are tax free (if the annual cover is at least 10 times the premium). So
- while equity MFs and equity ULIPs are at par, with long term capital gains being tax-free,
- debt ULIPs are tax-free whereas debt MFs may have to pay normal tax depending on the inflation rate (long term capital gains tax on debt funds is now 20% with indexation benefit).
In addition, with the surrender charges now set at nominal levels subsequent to the regulatory changes, premature closure of policies does not cause any major damage.
In view of the aforesaid developments, you no longer need to fear the ULIPs.
In fact, you can welcome them with open arms... of course, with a few caveats...
... ULIPs have a lock-in of 5 years. So only the long-term funds can be deployed here.
... You have to pay mortality charges. So if you don't need insurance, it is best to stick to MFs
... (And this is important) Mutual Funds are relatively a more standardized products, making it easier to choose the right funds. With ULIPs you need to conduct a much wider and deeper comparison to identify the right ones.
