How is a New Age ULIP Different from a Traditional ULIP?
While a traditional ULIP and a New Age ULIP might sound similar, there are various changes which were brought forth after the 2010 IRDAI regulations. The following table lists the key differences between a New Age ULIP and a Traditional ULIP.
| Parameter |
Traditional ULIP |
New-Age/4G ULIP |
| ULIP Charges |
Traditional ULIPs often boasted of high and front-loaded ULIP charges. Charges such as the premium allocation charge, uncapped fund management charge and various other policy administration charges were charged during the initial years of the policy, making it financially heavy for the investor. |
New-age ULIP charges are comparatively lower and are capped by IRDAI. These charges are also spread over the years to ensure that the investor is not burdened in the initial years of the plan. Various charges like the premium allocation charge and the admin charges are reduced or waived in various plans. Some insurers also refund the mortality charge once your mortality charge. |
| Discontinuance treatment |
Policy would lapse and lose its value |
The policy is shifted into a discontinuance fund with a minimum guaranteed return of 4% as set by the IRDAI |
| Flexibility |
Insurers used to charge for switches between funds |
Insurers offer various free switches throughout the year. |
| Transparency |
Charges would often not be disclosed up front and would be buried within a large amount of paperwork. |
IRDAI has mandated a standardised disclosure of all policy terms, conditions and charges |
| Tax Treatment |
Maturity amount remains tax-free irrespective of the premium |
Tax-free maturity only if the annual premium is below ₹2.5 lakh. Any gains exceeding the aforementioned limits are taxed as capital gains at 12.5% LTCG. |
What are the Features of 4G ULIPs?
Let us look at the key features of 4G ULIPs
- High cost efficiency and reduced charges: Traditional ULIPs charged high ULIP charges. The 4G ULIP brought about the following changes:
- Minimal allocation and administrative charges: Many new-age ULIPs have zero allocation and administrative charges, and all your premiums are directed towards investments.
- Capped fund management charges: IRDAI has capped management charges at 2.25% to 3%. The insurer cannot charge you more than the mandated value.
- Minimal surrender and mortality charges: ULIPs have also seen a high reduction in charges for surrender, mortality and premium reallocation.
- Flexibility and portability: 4G ULIPs provide a high amount of customisation and control to the investor.
- Fund selection: New-age ULIPs offer a large variety of funds for the investor to select from. These funds cater to the needs of different investors. You can choose amongst equity-based funds, debt-based funds or hybrid funds as per your needs and risk tolerance.
- Cost-free fund switching: New-age ULIPs also allow an investor to switch between various funds throughout the policy term. The investor is provided with a fixed number of free switches per year, after which they can pay a minimal cost to switch the fund as per their needs and the market performance.
- Customisable plans: You can choose and adjust your premium payment frequency, policy terms and the sum assured as per your needs and convenience.
- Transparency: Under the 4G ULIP regulations, the insurers are expected to practice upfront transparency and should present all charges, conditions, fund performance records and historical returns, clearly outlined in the initial policy documents for the investor to thoroughly go through and make a wise decision.
- Loyalty additions: 4G ULIPs also provide for built-in loyalty benefits. These benefits can include loyalty bonuses wherein extra bonus funds are added to your active investment portfolio. These benefits also include the refund of mortality charges after the policy has run its course and reached maturity.
- Digital-first experience: 4G ULIPs are designed for individuals native to the internet and offer paperless channels to purchase a policy, compare plans, track assets, switch funds, make top-ups and withdraw claims through dedicated mobile applications.
4G ULIP vs Other Investment Options
Let us compare 4G ULIPs with some other investment options to understand which is best for you.
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4G ULIP Vs Mutual Fund
| Parameter |
4G ULIP |
Mutual Fund |
| Objective |
The key objective is to provide life cover combined with market-linked returns |
The key objective of mutual funds is to generate market-linked returns |
| Life cover |
Insurance is attached to the plan |
No life insurance is provided |
| Lock-in period |
A 5-year lock-in period is mandated by the IRDAI |
No lock-in period (except ELSS) |
| Taxation |
Deduction up to ₹1.5 lakh is allowed under Section 80C of the old tax regime. Gains are taxed as Long-term capital gains at 12.5% if the annual premium exceeds ₹2.5 lakh per annum. |
Gains are taxed as short-term capital gains at 20% and long-term capital gains at 12.5% as per the holding period of the asset. |
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4G ULIP Vs Traditional Insurance Plan
| Parameter |
4G ULIP |
Traditional Insurance Plan |
| Structure |
Provides life cover along with market-linked investment |
Focuses on guaranteed benefits |
| Investment |
Has an investment element attached to the plan |
No investment element is attached to the plan |
| Taxation |
Deductions up to ₹1.5 lakh are allowed under Section 80C of the old tax regime. Gains are taxed as Long-term capital gains at 12.5% if the annual premium exceeds ₹2.5 lakh per annum. |
Deductions are allowed under section 80C of the Income Tax Act. Maturity proceeds are tax-free under the condition that the annual premium does not exceed 10% of the sum assured and the aggregate annual premium remains under ₹5 lakh. |
Conclusion
4G or New Age ULIPs have been designed to cater to the needs of an investor, which ensures that the investor is able to optimise their investments without bearing the burden of paying various charges. New age ULIPs also ensure transparent communication between the insured and the insurer, which helps avoid future implications.
