Title : No Load ULIPs as Tax Free

Abhay : Hi Sameer, we are often advised that we should keep insurance and investments into separate buckets. Then why do you think ULIPs should feature as worthy investment?

Sameer :  Yes you are right Abhay. So far we have known that the hidden costs of insurance policies are very detrimental for wealth creation. I have myself advised many clients to surrender their ULIP policies if those involved charges on the higher side. I surrendered mine way back in 2006. The high charges in policies impacted the trust of investors, and therefore it impacted the growth of industry.

However, IRDA (the regulator in Insurance industry) took notice of this…and consciously reduced the policy administration & marketing charges across all types of policies. You would be surprised that in some type of policies, the overall charges are either matching or lesser than the expenses in Mutual Funds

Abhay : OK. How can anyone ascertain if the ULIP policy being proposed by an advisor is really competitive to Mutual Funds?

The transparency brought in by IRDA is at par with what SEBI has done with MFs. The investor community is not fully appreciating this. You can very well ascertain the expenses in policy by going through brochure, policy wordings and the product illustration. These are all mandatory by IRDA and investor should always ask. On the top of it, there is a 14 day free look period from the date of policy issue…. just in case you change your mind or felt that this was not sold to rightly. Tell me, is there any avenue where you can return the investment with no questions asked. Think of it. There is none !

Abhay : Sameer, can you elaborate upon the expenses further and compare them with Mutual Funds?

Sure. But let me first submit that Mutual Funds are very crucial and have their own set of advantages. Secondly, the costs of Mutual Funds are very standardized and easy to understand. The same cannot be said for ULIPs. Thirdly, MFs vs ULIPs are not an apple to apple comparison. There are other aspects to be considered before we invest in either of them. However, if we compare the most economical ULIPs and a standard MF, then they stack up like this:

  1. Both of them don’t levy any entry load
  2. ULIPs have expense ratio capped at 1.35%, in comparison to 1.75% for MFs.
  3. ULIPs will have minor additional costs of policy administration charges. These are not applicable for MFs.
  4. ULIPs will come with some insurance charges, whereas some MFs which provide insurance for FREE i.e. without raising the overall charges.
  5. ULIPs win hands down on taxation. All equity and debt schemes of ULIPs are tax free, that gives flexibility to investors to quickly maneuver the asset allocation without worries of Long Term or Short Term Capital Gains, as it happens with MFs. So, you can quickly move from Equity to Debt, or Debt to Equity without worrying about associated taxes.

Abhay : Can we also discuss under what circumstances an investor should consider a ULIP over a Mutual Fund?

I would address it the other way around. I will give you situations when not to consider a ULIP..

  1. When high sum assured is a priority, go for term assurance. A ULIP is not a replacement of Term Assurance
  2. If your investment horizon is less than 5 years….. ULIPs may not provide any liquidity before 5 years.
  3. When you wish to take sectoral allocation in your portfolio…. ULIPs at present don’t have Pharma or IT sector options…but they do have large cap, mid cap, etc..
  4. When you wish to invest overseas markets or in gold….. ULIPs will not be able to serve these options.
  5. If you are above 45 years of age, then it is advisable that you take ULIP in the name of a younger member of the family, so that you keep the insurance costs low. Otherwise, don’t take.

Under all other circumstances, ULIPs can match or beat MFs.

Abhay : Lastly, we should also discuss about performance of the ULIP schemes. How do you rate the performance till date of various ULIPs available in the country?

I would say that there is no reason to complain when we look at the performance of ULIPs. There is great variety and strategies deployed by ULIP fund managers. Unlike MFs, ULIPs get money for really long term. Even in times of crises, generally people don’t withdraw from their insurance plans. Therefore, the fund managers have been giving a very decent returns. So…No complaints…both from Equity schemes and Debt schemes.


By Sameer Rastogi

18 years of experience, PG in Finance and has delivered Wealth Management lectures at IIM Lucknow, IBS Gurgaon and IIPM Delhi. Contributed to various newspapers. Strength – Application of Economic fundamentals to Investment

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