ULIPs that has lower costs and can work as a child plan

Almost all life insurance firms offer child plans in their portfolio. Some of these are market-linked policies, which allow policyholders to invest in equities and debt, while others are traditional plans, which invest only in debt. The premium paid for a child plan, in case of an insurance policy is eligible for tax deduction under Section 80C, while any income from the child plan is tax-free under Section 10 (10D).

Here, the policyholder is the parent and life insured is the child. If the policyholder dies, the child gets a lump sum that is a multiple of the yearly premium decided by the age at which the plan was bought. The idea is to keep mortality costs low while preserving tax efficiency. After the lump sum is paid, the insurer invests the remaining premiums on behalf of the policyholder and maturity benefits ensue as planned.

While the dispensation of the premium is certainly a big advantage, this double benefit doesn’t come free. The mortality charges for a child plan are higher than those levied by ordinary ULIPs. Type I ULIPs give only the higher of the two sums and, therefore, have a lower corporeality charge. Though the waiver of premium benefit is built into the child plan, you can opt for this benefit as an add-on rider in an ordinary unit linked insurance plans as well. On the other hand, in type II ULIPs, child plans give both the insured amount and the fund value to the nominee on the death of a policyholder.  For a 32-year-old taking a 15-year plan with a yearly premium of Rs 1.2 lakh, this benefit will cost around Rs 16,000 a year.

There are five funds for investments: three equity, one balanced, and one debt fund. You can choose on your own or take a lifecycle-based approach, where equity issuance tapers as you age and get closer to policy maturity. If you pay premiums regularly for the first 5 years, the policy invests 1% of the premium to the fund each year. ULIP benefits to those who want to start early on the equity advantage. Long-term investments also help get better and stable returns.

But you shouldn’t just buy unit linked insurance plans because of the tax advantage. You also need to understand the limitations of the product. For example, it is bundled with insurance so you pay for a cover you may not need. Also, it has concentration risk because if you want to invest in a large-capital fund, most likely there will only be one large-cap fund in the ULIPs. Make sure you understand the plan properly before investing.