- A ULIP
A ULIP or Unit Linked Insurance Policy is a product that combines investment and insurance. It is sold by insurance companies and regulated by IRDA. The maturity proceeds of a ULIP are exempted from tax under Section 10 (10)(D) provided the life cover is at least 10 times the annual premium.
- A mutual fund (You might disagree, but hear us out)
A mutual fund is a pure investment product, a pool of money managed by a professional fund manager. It is regulated by SEBI and sold by asset management companies (AMCs) or their distributors. The maturity proceeds of an equity mutual fund held for more than one year were exempted from tax (now taxed at 10%) by Section 10 (38) of the Income Tax Act.
LIC’s ULIS has all the appearance of a mutual fund, being managed by LIC Mutual Fund (the asset management company) and having units with a Net Asset Value (NAV). However unlike any other mutual fund, investing in it also brings a life insurance cover. The income distributed by the ULIS is claimed to be exempted by Section 10 (33) of the Income Tax Act. A bare reading of this section refers to income on the transfer of a unit of the Unit Scheme 64 issued under Schedule I of the Unit Trust of India Act, 2002. However it is possible that the ULIS is also covered by this section because LIC squarely makes the exemption claim under 10 (33) in the Scheme Information Document (SID). The SID also states that the scheme is eligible for a tax deduction under Section 80C.
You can either contribute
- A single premium of minimum Rs 10,000 and thereafter make additional contributions of Rs 1,000 or multiples of Rs 1,000 for a term of of five years or 10 years, or
- Rs 10,000 every year as a regular premium for 10 or 15 years.
Thus, unlike an open ended mutual fund, a ULIS has a maturity date – which is determined by the term you have chosen. However you can continue your investment in the scheme beyond maturity without the insurance cover. For such investors a bonus of 0.5% of your investment is provided every year till withdrawal.
You can also make contributions over and above the premiums you have signed up for. These additional amounts do not get you more insurance cover. You cannot make these contributions within three years of the maturity date of the ULIS.
Life Insurance Cover
The life insurance cover you get is equal to the premiums you contribute called the ‘target amount.’ This is a rather astonishing situation given that even single premium policies offer a cover of at least 1.25 times the premium you have paid. For an insurance policy to have a tax exempt maturity amount, the cover has to be at least 10 times the annual premium.
The scheme also offers something called ‘Auto risk cover’ which is life insurance cover that continues so long as you have paid the first year’s premium and maintain more than Rs 5,000 in the account. Thus if you default in paying the premiums you have signed up for, the life cover continues. Note that the cover in this case is also merely equal to the ‘target amount’ or the total premiums you’ve signed up for.
The scheme has neither the growth option nor the dividend payout option. It only has the dividend reinvestment option. Why? We’re as stumped as you.
Your investment in the scheme is locked in for three years, rather like an ELSS fund. However the ULIS isn’t an ELSS fund, strictly speaking.
Unlike with mutual funds, the ULIS has an age of eligibility that goes from 15 to 55 for regular premium and 15 to 60 for single premium.
You also get a odd sounding benefit called a ‘final reward on maturity.’ This is:
For the Regular Premium – 10% of the insurance amount for a 15 year term and 7.5% of the insurance amount for a 10 year term.
For a Single Premium – 10% of the insured amount for a 10 year term and 5% of the insured amount for a 5 year term.
You must have paid all the premiums you signed up for to get this ‘final reward.’
The ULIS is meant to act like a balanced fund with an equity allocation going from 65 to 80% and a debt allocation ranging from 20 to 35%.
The fund has delivered a 10 year annualised return of 6% and a five year return of about 11%, both lower than the Value Research category (hybrid – equity oriented funds) average.
If we had to name one hard-to-comprehend, oddly structured and underperforming product, this would be it.