Insurance companies launch various kinds of policies to offer benefits as per the needs of customers. If you go for unit-linked policies, you can expect higher returns. This insurance plan is ideal for retirement planning as well.
Unit-linked policies offer many choices for investors. It is possible to opt for either 100% equity or a 100% debt fund. As per your risk profile, you can opt for a combination of equity and debt funds as well. If you choose a ULPP (Unit Linked Pension Plan), you can switch very easily. You will be able to change the fund profile at any time.
Unit Linked Pension Plans
With the introduction of regulatory changes, many ULPPs vanished from the market in 2011. As per the changes, the insurance companies were mandated to deliver guaranteed returns of 4.5% to customers. As insurers found it difficult to offer guaranteed returns, these plans were taken off the table.
In 2012, the Insurance Regulatory and Development Authority (IRDA) offered a reprieve to insurers who offered guaranteed returns for cases of early surrender. Hence, the companies were able to introduce these plans again. However, the insurance policy must protect the principal. Even though traditional pension plans are available in the market, the demand for unit-linked plans is very high.
You can buy unit-linked pension plans from reputed insurance companies like HDFC Life and Birla Sun Life. The drawback with the capital protection guideline is that the insurance company will not invite any risk by investing in equity funds. On the other hand, the insurance companies will also demand an additional ‘investment guarantee charge’ which will be an additional burden for investors.
Features of ULPPs
You should understand the eligibility, policy term, and equity exposure before selecting ULPPs.
- Entry age – The entry age for ULPPs ranges between 35 years to 70 years old.
- Policy payment term – The policy payment term will be the same as the policy term. The policy term can be 5, 10, 15, 20, 25 or 30 years, as per your selection.
- Premium allocation rate – The premium allocation rate will be low during the initial years and will increase during the later years.
- Fund management expenses – Customer will have to bear the fund management expenses which will be in the range of 1 to 1.35%
- Policy administration charge – The policy administration charge will be high during the initial years. It will be in between 0.3% to 0.4% or Rs. 25 per month. The charges vary from one company to another company.
- Investment guarantee charge – The insurance company charges an additional amount to guarantee the investment. The charge will be in between 0.4% to 0.5%.
- Guaranteed maturity benefit – The guaranteed maturity benefit will be between 101% and 195%.
- Guaranteed death benefit – The guaranteed death benefit will be offered as per the terms and conditions of the insurance company. In most of the cases, the amount paid will be more than the premium paid by the customer.
Enlisted below are 5 things you need to know about Unit Linked Pension Plans:
- Asset Allocation Choice
When you choose a ULPP, you should determine the risk you’re willing to undertake. The insurance company will invest the money as per your risk appetite. There are investors who are willing to go for a 100% equity option, which carries the highest level of risk. In most cases, the equities will return a decent sum over a long-term period.
For risk-averse customers, part of the premium can be invested in debt funds and the remaining amount can be invested in equities. The equity and debt ratio can be 100:0, 50:50, 75:25, 25:75 or 0:100 as per the risk-raking capacity of the investor. As the investment is protected under all circumstances, policyholders can choose the best option as per their needs.
As a policyholder, you should completely understand the details of the plan you choose. You should not be overwhelmed by the advice or suggestions offered by agents. You will not be unduly stressed, if you are completely aware of the nitty-gritties of the policy implementation procedure. The proceeds of the investment can be used for your retired life, the purchase of a home, for children’s education, or children’s marriage. Hence, the ULPP should fulfill your financial goals without any hiccups.
- Claim Settlement Ratio
The claim settlement ratio plays an important role in the selection of ULPP. The unit linked pension policy is an insurance policy which acts as an efficient source of retirement income. Unit-linked policies will give you the freedom to maximize your returns on investment. The nominee will receive the fund value in case of the death of the policyholder.
The claim process should be simple and effective. As soon as the claim intimation is provided to the insurance company along with the submission of necessary documents, the decision on the claim should be conveyed to the nominee or policyholder. For ULPPs, the NAV will be applied as per the maturity date but not the withdrawal date.
You should choose ULPP from an insurance company which maintains a high claim settlement ratio.
You can change your investment decisions as per your convenience. Switching is nothing but moving from one fund to another fund. The switching can take place at any time. When you opt for a new fund, the premium will need to be redirected. The future premiums will be routed to the new fund. Thus, you can increase the overall profitability of your ULPP by using the switching mechanism.
You should be aware of the expenses involved in switching from one fund to another fund. If the existing fund’s performance is not up to the mark, you can choose a better-performing fund to increase your gains.
- Pre-mature Withdrawal
Pre-mature withdrawals are not permitted by the ULPP. You will need to buy the annuity at the end of the maturity term. Especially since you will not be able to withdraw a portion of your fund during the initial 5 years of subscription. It is not possible to surrender the plan before the end of the lock-in period either.
If you fail to pay the regular premium for less than 3 years, your funds will be kept under suspension and the surrender charge will be deducted. The funds will be paid at the end of the third year. If you revive the policy, the funds will be paid at the end of the 2 years. These rules and regulations vary from one company to another. You should go through the documentation to understand the benefits and penalties applied to your pension policy.
- Long-term Investment
The ULPPs are offered with a 5-year lock-in period. After the maturity of the policy, you will want to buy an annuity from the same insurance company.
The corpus accumulated by the pension plan will be converted into the annuity. As you choose a ULPP, you will have a long-term commitment to the insurance company. One-third of the maturity amount will be tax-free and the remaining amount should be invested in the annuity plan. The proceeds of the annuity will be taxable with income generated from other sources.
Planning for ULPP
There are ULPPs for wealth creation, retirement, child education and health benefits. If you choose a policy for retirement, the amount will be deducted by the employer automatically. You can also choose an SIP (Systematic Investment Plan) so that the monthly premium can be increased or decreased as per your convenience.
You can choose a ULPP which offers insurance coverage, market-linked returns and tax benefits. You will have the flexibility to choose your investment options as per your risk appetite. When you are young, you can take the higher level of risk so that your wealth can accumulated over a long period of time. With a typical pension plan of 15 years or more, you can accumulate wealth efficiently.
While choosing the ULPP, you should be aware of various kinds of expenses and charges. The expenses are incurred for administration, fund management and record keeping. Every insurance company offers a fixed number of switch options free of cost, so that it is possible for investors to switch from one fund to another without incurring losses.
You should be aware of the surrender value and charges, so that you do not suffer a loss when you fail to pay a monthly subscription due to a change in job or unemployment.
You can invest in ULPPs online after comparing the best plans of reputed insurance companies.
You should retire with dignity and financial security. ULPP is a great option as you will be able to contribute towards your pension fund and there will be income tax deduction on the premium as well. It can be considered as one form of savings and the amount will be locked for at least 5 years as per the plan. You should choose a ULPP offered by a reputed insurance company so that your financial interests are protected. If you can take the risk, you should invest in ULPP so that there will be capital appreciation and you can make the most of your investment.
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