Unit linked Plans and Annuities in Life Insurance

A unit linked plan is also an investment oriented product. As compared to other investment plans, the investment portion of the unit linked plan functions like a mutual fund. It is invested in a portfolio of debt and equity instruments, in conformity with the announced investment policy. Hence, it grows or erodes in line with the performance of that portfolio. Of course, throughout the period of investment, the policy holder enjoys an insurance cover as stipulated.

Term Assurance:

This is a pure protection policy, which provides a benefit on the death of an individual within a specified term for example, one, ten or twenty five years. Premiums may be paid regularly over the term of the policy [or some shorter period] or as a single premium at outset. Generally, there is no payment if the policyholder survives to the end of the policy. However there are term assurance policies, which offer some proportion of premiums paid on survival to the maturity date of the policy.

A popular variant of the term assurance policy is the decreasing term assurance policy under which the sum assured decreases over the term of the policy. This type of policy can be used to meet two such specific needs. First, it can be used to repay the balance outstanding under a loan [e.g. credit life insurance] in the event of the death of the policyholder. Secondly, it can be used to provide an income for the family of the deceased policyholder from the time of death to the end of the policy term.

Term assurance policies are typically offered in the non-participating format. These policies are usually structured with no surrender value and paid up policy options. The main attraction of a term assurance policy is that it provides a death benefit at a lower cost than under an endowment or whole life policy for the same level of benefit.

Immediate Annuity: This type of policy meets the policyholder’s need for a regular income, for example after his or her retirement. The policy can also be structured to provide an income for a limited period, for example to pay the school fees of the policyholder’s children. The regular income is purchased by paying a single premium at the inception of the policy. Strictly speaking the regular income ceases on the death of the policyholder. There are however variants of this policy under which a reduced income may be paid to the spouse (of the policyholder) over his or her life time; or the single premium may be returned to the dependents of the deceased policyholder.

Immediate annuities can be offered either in the non-participating format or in the participating format. In the case of a participating annuity the income paid to the policyholder is a guaranteed amount plus a bonus added by the insurance company. Usually no payment is made to the annuitant on withdrawal. Put differently, there is no surrender value option associated with this type of policy.

Deferred Annuity: The usual structure of this policy is that the policy holder pays regular premiums for a period up to the specified vesting date. These premiums buy amounts of regular income, payable to the policyholder from vesting date. A single premium at the start of the policy is a possible alternative to regular premiums.

A deferred annuity enables the policyholder to build up a pension that becomes payable on his or her retirement from gainful employment. At the vesting date of the annuity, the alternative of a lump sum may be offered in lieu of part or all of the pension, thereby meeting any need for a cash sum at that point, for example to payoff a housing loan.

Riders are add ons to the life insurance policies described above. These add-ons can be purchased with the base policy on payment of a small additional premium. The commonly offered riders in the Indian context are:

1) Accidental Death Benefit (ADB) Rider
2) Critical Illness (CI) Rider
3) Waiver of premium (WoP) Rider
4) Term Rider

Tax Breaks:

At the time of writing, the tax breaks from a policyholder’s perspective are as follows:

The premium payable under a life insurance policy can be deducted from taxable income under Section 80 C of the Income Tax Act 1961, In the case of an individual, this insurance policy can be on the life of the individual or on the life of the spouse of the individual or on the life of any child of the individual. The deduction under Section 80 C is also available for premiums payable under a non- commutable deferred annuity; and for contribution made by the individual to any notified pension fund set up by a Mutual Fund or by the UTI.

The premium paid by an individual under an annuity plan of the Life Insurance Corporation of India or of any other insurer (as approved by the IRDA) is deductible from the taxable income of that individual subject to a maximum amount of Rs 10,000 [Section 80 CCC of the income Tax Act]

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt from tax under Section 10 (10 D) of the Income tax Act.

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