Should you opt for ULIP with minimum sum assured?
The sum assured is a minimum guaranteed amount that your Ulips gives your nominee in case of your death. The payout in case of death during the policy term is tax-exempt even in cases where the sum assured is less than 10 times of the premium paid.
One big negative associated with going for a sum assured of less than 10 times of the premium paid is that you will not be eligible for tax benefits which would be available on sum assured of 10 times of premium or more. So, should you buy ULIPs with minimum sum assured of 7 times of premium paid? Only in certain cases is this beneficial. Read on to find out what these cases are.
According to the notification issued by the Insurance Regulatory and Development Authority of India (IRDAI), the minimum sum assured for buying Ulips for people below 45 years of age has been reduced from 10 times to 7 times the annual premium paid. Now, even if you are below the age of 45, you can buy a Ulip with a minimum sum assured of seven times the annual premium as against an earlier minimum sum assured of ten times. Earlier, only people over 45 years of age were eligible to buy Ulips with sum assured less than 10 times of annual premium. In effect, this notification has made Ulips uniform across all age groups.
The sum assured is the amount the policyholder is insured for in case of the policyholder's death (or disability in certain cases) during the policy term. The higher the sum assured, the higher the mortality charges that get deducted from the premium amount. So, if you buy Ulips with a sum assured of 7 times the annual premium paid, the part of the premium which gets invested will be higher and therefore, yield more returns over a period of time as smaller amount of mortality charges are deducted.
Kapil Mehta, Co-Founder, SecureNow, a Delhi-based Insurance Broker, said, "The changes in sum assured is a simplification of product that is easier for insurance buyers to understand. The lower sum assured should result in better returns because a lesser amount of mortality charges will get deducted."
However, you must remember that because maturity value of the policy in case of sum assured less than 10 times of the premium paid is taxable therefore post tax return on maturity will be reduced to the extent of tax paid.
The payout in case of death during the policy term is tax-exempt even in cases where the sum assured is less than 10 times of the premium paid. Consequently, post tax return of policy on death of insured is the same as pre-tax return.
So, should you opt for Ulip now that the minimum sum assured has been lowered? Before that, let us first understand what has changed in the current regulations.
|Earlier Regulations||Earlier Regulations||Current Regulations|
|S. No.||Type of Ulip Product||Buyer/Insured less than 45 Years||Buyer/Insured more than 45 Years||Same across all ages|
|1||Single-Premium||Highest of 125% of the single premium or minimum guaranteed sum assured on maturity or any absolute amount assured to be paid on death||Highest of 110% of the single premium or minimum guaranteed sum assured on maturity or any absolute amount assured to be paid on death||Highest of 125% of the single premium or any absolute amount assured to be paid on death|
|2||Other than Single Premium||Highest of, 10 times the annualised premium or 105% of all the premiums paid as on date of death or minimum guaranteed sum assured on maturity or any absolute amount assured to be paid on death||Highest of, 7 times the annualised premium or 105% of all the premiums paid as on date of death or minimum sum assured on maturity or any absolute amount assured to be paid on death||Highest of 7 times the annualised premium or 105% of all the premiums paid as on date of death or any absolute amount assured to be paid on death.|
Can existing policyholder reduce sum assured to maximise investible corpus?
It is not possible for you to change or reduce the sum assured after you have bought the policy. Naval Goel, CEO of PolicyX.com, an online insurance web aggregator, said, "Once you have purchased the policy on agreed terms, it is not possible to reduce the sum assured during the policy tenure. You must stick with the sum assured that you had chosen earlier. Insurers don't allow you to make such changes during the policy tenure and premium paying term (PPT). However, if you are an existing policyholder and want to get better returns, you can possibly make switches between the funds in which your money (investable part of premium) is invested."
According to IRDAI's linked-insurance product regulations, "Insurers may extend an option to the policyholder to alter the PPT or policy term provided that such alteration is in accordance with their board approved underwriting policy, subject to the PPT for all other individual policies shall not be less than five years."
Has Ulip become a more attractive investment option now?
The sum assured is a minimum guaranteed amount that your unit-linked investment plan gives your nominee in case of your death. However, when it's a death case, the insurer will have to pay the policyholder or the nominee the highest value of the following:
- The minimum sum assured, or
- The fund value as on that day, or
- 105 percent of the premiums paid.
Therefore, buying a Ulip with minimum sum assured could be considered in some cases.
1. When you buy a minimum sum assured policy with annual premium payment option
Here are two conditions when an insurer will pay higher than sum assured to the nominee.
a) If the investment corpus (that is part of the premium which is invested, and yields return) exceeds the minimum sum assured and total premium paid, the insurer will pay the fund value as on that day.
b) If the total premium paid for the number of years exceeds the sum assured in that period of time and the fund value as on that day, the insurer will pay 105 percent of the premiums paid.
In case of scenarios a or b above, it is likely that the lower sum assured results in better returns because a lower amount of mortality charges gets deducted.
2) When you buy a minimum sum assured policy with a single premium payment option
If you buy a single premium policy, the insurer will either pay the minimum sum assured or fund value, whichever is higher at the time of death claim.
Note: The 105 percent of the premiums paid condition will never be applied if you buy a policy with single premium payment option. This is because the amount of single premium will always be lesser than the sum assured since the sum assured is a multiple of the single premium paid for the policy.
Let us understand the following three scenarios: Assuming that the policyholder dies at a time when the equity market is going through a bear phase, where the invested corpus has not surpassed the sum assured in all the three situations as mentioned below:
Let us assume, a policyholder bought a policy with a minimum sum assured of 7 times the annual premium instead of 10 times the annual premium and dies, say, in the 4th policy year. Assuming further that the policy term is 15 years. So, after paying premium of Rs 10,000 for a sum assured of Rs 70,000 (S.A. equals to 7 times of annual premium), the insurer will pay Rs 70,000 to the nominee (as 105 percent of the premiums paid condition will not apply because 105% of 40,000 (premium paid so far) will equal to Rs 42,000 only, which is less than Rs 70,000).
Note: If the sum assured is less than 10 times the annualised premium, the investible corpus received at the time of maturity will become taxable. However, if it's a death case, as mentioned in situation 1, no tax will be deducted.
Suppose, a policyholder paid a premium of Rs 10,000 for a sum assured of Rs 70,000 and dies, say, in the 12th policy year. Assume the policy term is 15 years. So, the insurer will now pay Rs 1.26 lakh and not Rs 70,000 (The 105 percent of the total premiums paid condition will apply as 105% of Rs 1.2 lakh (premium paid so far) has exceeded the minimum sum assured).
Note: The total annual premium collected during the policy term can exceed the sum assured of the plan, especially if the Ulip insurance plan is taken for the long term, that is, more than 10 years.
Thus, if the policyholder falls under situation 2, the fact that the minimum sum assured has been chosen will not be relevant as the policyholder has already paid total annual premium amount more than the sum assured, and hence, the insurer will pay the 105 percent of the premiums paid so far to the family member (nominee).
Now, here is the situation when an insurer will pay the minimum sum assured
a) If your investment corpus has not grown to surpass the sum assured AND;
b) If the time period for which you have paid the premium is short where the total premiums paid for the number of years does not exceed the sum assured. Hence, the 105 percent condition will not get applied. The insurer will pay the minimum sum assured. Hence, the 105 percent condition will not get applied. The insurer will pay the minimum sum assured.
Here also in the case of death claim the payout will be tax exempt.
Should you go for a ULIPs with a minimum sum assured?
Experts say that seven times cover means lower mortality charges, which would result in higher investable corpus leading to higher absolute returns. However, opting for only a minimum sum assured of seven times the annualised premium may not be tax-efficient. Hence, you could have a lower post tax return despite a higher investible corpus. According to income tax laws, if you have bought a Ulip policy with a sum assured of less than 10 times the annual premium, you are not eligible to claim tax benefits.
Aalok Bhan, Director, CMO, Max Life Insurance said, "The minimum sum assured now being seven times the annualised premium, will have income tax implications. For availing income tax saving benefits of Rs 1.5 lakh and maturity benefit under section 80C and section 10 (10D) of Income Tax Act respectively, the minimum sum assured needs to be 10 times the annualised premium for the policyholders to take advantage of tax deductions and exemptions respectively."