Maturity Benefit of ULIP Plans

Unit-Linked Insurance Plans (ULIPs)¹ are market-linked life insurance plans that offer two major benefits –

• They help you earn market-linked returns and build up a corpus, this comes with associated risks in market.
• They provide life insurance protection during the policy tenure

This means that when you invest in ULIPs, your premium is directed toward the market-linked funds that you choose. Your investment, then, yields returns depending on the performance of the chosen fund & market conditions, among several other factors.

For instance, if you have invested in an equity fund and the equity markets are on the rise, your investment would also grow. Similarly, if the equity market goes down, the investment would also suffer. Over the policy tenure, your premium is accumulated into the fund value, which moves in tandem with the market. This helps you create a market-linked corpus for your financial goals where the returns depend on the market movements and the underlying fund chosen by the policyholder.

In the event of your death during the policy term, ULIPs pay out a death benefit, that is, the sum assured under the plan, to your nominees. Upon policy maturity, ULIPs pay out the fund value as a maturity benefit as per the policy terms & conditions. ULIPs also allow the benefits of partial withdrawals, switching, premium redirection, top-up premium, etc., so that you can manage your investments per your needs. But do you know the benefits that ULIPs pay?

Let’s understand.

Benefits Under ULIPs

Before understanding the benefits payable under ULIPs, there are two aspects of the plan that you need to know –

1. Sum assured

The sum assured in a ULIP is expressed as a multiple of the premium paid². For instance, if you pay a premium of Rs.1 lakh and the sum assured is 10 times the premium, you will get a coverage of Rs.10 lakhs.

2. Fund Value

The fund value represents the overall value of your investments after factoring in the ULIP charges, and the returns earned. In simpler terms, the fund value is calculated by multiplying the per unit price (current NAV) by the number of units in your fund³. Now that you know these terms, let’s understand the benefits paid under ULIPs.

There are two main benefits, among others, that ULIPs pay –

1. Death Benefit

Since ULIP is a type of life insurance plan, it covers the risk of a premature demise. If the life insured happens to pass away during the policy tenure, ULIPs pay the death benefit. This benefit is expressed as the higher of the sum assured or the available fund value as of the date of death⁴ under some ULIP plans. This will vary from plan to plan and company to company.

However, there are other types of ULIPs too, called Sum Assured plus Fund Value ULIPs⁵, wherein the death benefit is calculated by adding up the sum assured and the fund value⁵.

For instance, say Mr Sharma bought a ULIP paying an annual premium of Rs.1 lakh. The sum assured is Rs.10 lakhs. Mr Sharma died in the 10th year of the policy when the fund value was Rs.12 lakhs. In this case, ULIPs will usually pay the higher of the sum assured or the fund value, which is Rs.12 lakhs, as a death benefit. However, if Mr Sharma had opted for the Sum Assured plus Fund Value ULIP, the death benefit would be Rs.22 lakhs (Rs.10 lakhs + Rs.12 lakhs).

2. Maturity Benefit

If the insured person survives the entire policy tenure, ULIP pays the maturity benefit, which is the available fund value as of the date of maturity⁶.

Please note that Insurer may also provide a facility called ‘settlement option’ to the policyholders wherein they can receive the maturity or death proceeds in instalments as per the terms and conditions stated in the policy.

What Happens to ULIPs After Maturity?

Once the plan matures, the coverage stops. You get the maturity benefits and the coverage is terminated. However, if you have chosen the settlement option, your fund value stays invested in the selected funds. The coverage does not continue but you can earn market-linked investment returns over the next five years when you withdraw the corpus systematically under the settlement option.

How to Claim a Maturity Benefit?

In the case of maturity, the insurance company usually starts preparing for the claim payment before the maturity date. On the day of maturity the company will process the maturity amount and initiate the payment. Ensure your bank details are recorded with the insurer for hassle-free payout⁸.

Taxation on Maturity & Death Benefit⁷

The death benefit paid out under a ULIP plan is exempt from taxation.

The maturity benefit of a ULIP has specific taxation rules that you need to know. Here are the applicable rules –

• If you had bought the ULIP before 1st February 2021, the maturity proceeds would be tax-free if the premium is up to 10% of the death sum assured—section 10(10D) of the Income Tax Act, 1961 grants this exemption.
• If you bought the ULIP on or after 1st February 2021, the maturity benefit would be tax-free, provided the aggregate annual premium under all ULIPs is up to Rs.2.5 lakhs and policy is satisfying Section 10(10D) conditions as mentioned there under.
• If the annual premium exceeds Rs.2.5 lakhs and the ULIP is bought on or after 1st February 2021, long term capital gains tax would apply. Here’s how –
  • If you had invested the premium in debt-oriented funds, the earned returns would be taxed at 20% without the benefit of indexation.
  • For equity-oriented funds, tax exemption is allowed for returns going up to Rs.1 lakh. Returns over Rs.1 lakh are taxed at 10%.

So, understand the death and maturity benefits payable under ULIPs and their tax implications. The death benefit is always tax-free irrespective of the premium amount7, while the maturity benefit might be taxable depending on your policy details. So, know the benefits so that you can plan for your financial goals accordingly.

References

1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 163-167)

2. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 165)

3. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 166)

4. https://cleartax.in/s/unit-link-insurance-plan-ulip

5. https://www.deccanherald.com/brandspot/pr-spot/have-you-heard-of-type-1-and-type-2-ulip-plans-1141440.html

6. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (page 293)

7. https://cleartax.in/s/unit-linked-insurance-plan-taxation-rules

8. https://www.livemint.com/Money/f0W8SrEmN7ybqWUqDMkJ5M/How-to-make-a-life-insurance-policy-claim.html

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