How are ULIPs Surviving in the World of Mutual Funds?

The metro navigator or pilot takes its passengers to a single destination. So the metro driver, in this case, can be called the fund manager of mutual funds. The metro rail could be known as the scheme, and the passengers of the metro rail are the investors. 

Difference Between MFs and ULIPs

The most significant difference between the two plans can be better comprehended by understanding the purpose of the policies. Mutual Funds do not cover life insurance, while ULIPs offer returns as well as life insurance coverage to the beneficiary of its policies. In addition, the insurance company under ULIPs promises the insured family to provide a sum on the demise of the insurer. Let us understand it with an example.

Mr. A and Mr. B are two brothers cum investors who received a sum of INR 50k by selling their bikes. Mr. A invested his money in ULIPs, while Mr. B opted for mutual funds. All of the money they received was invested in both of these plans. Mr. A, who invested in ULIPs, becomes a beneficiary to avail of a life insurance policy. One portion of his investment goes into life insurance coverage, while the other portion invested in government bonds guarantees him a good return on his investment.

On the other hand, Mr. B, who opted for mutual funds, needs to buy a separate life insurance policy to meet the demands of his family post his death. Mr. A was assured of receiving a sum of INR 6 lakh on his demise, which will benefit his family by meeting their requirement. However, a few years later, Mr. A met with an accident and lost his life. Now, the insurance company is bound to compensate his family with the sum assured of INR 6 lakh or the value of the fund, whichever is more. However, it is not the case with Mr. B since he is required to buy a separate life insurance policy to provide coverage for his family post his death. 

Advantages of ULIPs 

ULIPs are a combination of insurance policies as well as investment plans. It guarantees the investor to provide a specific amount to the beneficiary from life insurance coverage. Further, it is at the discretion of an investor to select a plan to make an investment of another portion of the money left after investing in life insurance coverage. Let us discuss some advantages of ULIPs, which are the reason for their survival in the world of mutual funds. 

1. Additional Protection for Investors

   ULIP products provide some additional protection to its investor, who invests in ULIP for the purpose of saving. Investors who are worried that the future demand of their family might not be met in their absence should invest in ULIP products. The ULIP products offer a lump sum amount to the assured to meet the need upon their death. An example of this situation might be the education fee of a child. The ULIP product continues to pay the expense of the child in the absence of the investors. It also becomes a regular source of income for the rest of the life of the family members. 

2. Tax Saving

   An investor may enjoy the tax deduction benefits in ULIPs under section 80C of the Income Tax Act. The money that an investor invests in the ULIPs plan gets deducted from the taxable income. In addition, the insurance claim received by the beneficiary also gets tax deductions under section 10 (10D) of the Income Tax Act. However, a mutual fund does not reduce taxes. Therefore, the investor is duty-bound to pay taxes from the taxable income. 

3. Charges

   Mutual funds and ULIPs charge a certain amount for the maintenance of the fund. The MFs charge for the management of funds and an exit fee. The exit fee is levied if the investor sells the unit soon after investing in the MFs. Hence, an exit fee could be better comprehended as a penalty fee charged by the Mutual fund. 

   ULIPs impose charges under specific heads. These heads include administrative costs, premium allocation charges, and management charges. In addition, the portion that an investor invests towards insurance premium also gets charged as a mortality charge. 

   However, the charges of MFs are higher than those levied by ULIPs. A ULIP product usually charges 1.35%, whereas the MFs charge 2.5%. The IRDAI (insurance regulator) mandated that the total charge under ULIP cannot exceed 2.25% in any circumstances. Hence, whatever the case, the ULIPs charges will always be lesser than MFs.  

Conclusion

ULIPs are a suitable plan for investors with long-term financial goals. It provides dual benefits of saving and protection. It is at the discretion of the investor to choose the investment market. He may select equity or invest in a government bond. Hence, the investor with a financial objective to meet multiple needs over a longer period must invest in a ULIPs product.

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