Simplifying Life Insurance in India
Everything about Unit Linked Pension Plans: Meaning, Features & Working Explained
A well-planned retirement can ensure financially secured and peaceful golden years of life.
One of the most versatile investment solutions towards this goal of a secure retirement are the Unit Linked Pension Plans (ULPPs). ULPPs offer a unique blend of investment and retirement planning, catering to the diverse needs and aspirations of people looking for a well-planned retirement.
Read on to know more about these investment plans, understand their benefits, investment potential, and the crucial role they play in shaping a prosperous post-retirement life.
What are Unit Linked Pension Plans?
Unit Linked Pension Plans (ULPPs) are the market linked insurance products that serve the dual purpose of investment and insurance, thus providing financial security and wealth accumulation during retirement.
In these plans, policyholders contribute premium, which is then invested in a wide range of funds, including equities, debt, or a mix of both, as per the investor’s choice.
The investors have complete control on their investment portfolio. They can allocate and switch funds as per their risk appetite, thus optimising and growing their corpus.
While the ULPPs provide death benefit during their policy term, they also provide a maturity benefit at the time of maturity, if the policyholder survives the term. This maturity benefit is paid in the form of lumpsum or periodic payments, thus ensuring financial protection during retirement years.
How Unit Linked Pension Plans Work?
- Step 1: Choose your vesting age, i.e., the age when you would like to start receiving your pension.
- Step 2: Choose investment options as per your risk profile and investment objectives.
- Step 3: Choose your premium amount and frequency. You can choose single premium option if you have lumpsum available for investing or regular pay if you want to follow a disciplined approach to investing.
- Step 4: You can also add riders to your plan as per your requirements. These riders enhance your policy benefits by covering various risks with a nominal additional premium.
- Step 5: Once your policy is confirmed and active, there are two phases of your investment:
- Accumulation Phase:
- This is the time when you are paying premiums, and the insurance company invests and grows it on your behalf.
- Reaping Phase:
- Reaping or vesting phase is the time when you start receiving the benefits from your policy. A portion of your return is paid to you and the rest is invested in an annuity scheme that provides you regular income that is taxable.
Features and Benefits of Unit Linked Pension Plans
The key features of Unit Linked Pension Plans are:
1. Eligibility
The investors must be between the age of 35 to 70 to be eligible to invest in this plan.
2. Premium
As with other insurance plans, the premium allocation is low in the initial years of investment, however, it grows gradually over the years.
3. Returns
As per the market trends, ULPPs usually provide lucrative returns which makes them a good option for wealth accumulation.
4. Market-Linked Investments
ULPPs offer investment options in various funds, including equities and debt, allowing policyholders to potentially benefit from market returns.
5. Retirement Corpus
These plans are designed to accumulate a retirement corpus over the policy term, providing financial security during retirement. Apart from the fund value, some ULPPs also provide guaranteed loyalty additions to the plan.
6. Flexibility
ULPPs offer flexibility in premium payment frequency, allocating choice of funds and in switching funds. They also provide the option of top-up premium, wherein you can enhance your retirement corpus by investing more in the later years.
These features of flexibility make it convenient for policyholders to maintain and optimise their investment as per their choice.
7. Partial Withdrawals
ULPPs, as with other ULIPs, allow partial withdrawals after a lock-in period of 5 years, thus enabling policyholders to access funds in emergencies.
8. Vesting Age
Vesting age is the period when you start receiving your pension. Policyholders can select a vesting age typically between 50 to 75 years as per your requirements.
9. Death Benefit
ULPPs offer a death benefit to the nominee in case of the demise of the policyholder. This death benefit, in most cases, is the higher of fund value or 105% of the cumulative premiums paid.
10. Annuity
On retirement, the investors can withdraw 60% of the corpus, while the remaining is invested in an annuity scheme that becomes a regular source of taxable income.
11. Tax Benefits
Contributions made towards ULPPs are eligible for tax deductions under Section 80C, and pension received is tax free under Section 10(10D). However, the tax benefits are as per the prevailing tax laws.
12. Surrender Options
Policyholders have the option to surrender the policy and receive the fund value after a lock-in period of 5 years.
13. Riders
As with other insurance products, ULPPs also provide the option of adding riders to the plan. Apart from the regular riders like critical illness, accidental death benefit, these pension plans also offer riders like Partner care rider, wherein you can guarantee a retirement benefit for your spouse in the event of your unfortunate death.
What are the Charges Applicable in a Unit Linked Pension Plan?
All kinds of ULIPs have certain charges applicable, and ULPPs being a type of ULIP, follow the same. As an investor, you must be aware of all these charges.
Here are the major categories of charges applicable in a Unit Linked Pension Plan:
1. Fund Management Charges
These fees are associated with managing and maintaining the investment funds within the ULIP and are charged as a percentage of the value of assets.2. Discontinuation Charges
Imposed when policyholders discontinue the plan prematurely, such as surrendering or stopping premium payments before the lock in period.3. Mortality Charges
These cover the cost of life insurance and are based on the policyholder's age and coverage amount.4. Surrender Charges
Levied when the policy is surrendered or partially withdrawn before a certain lock-in period.5. Premium Allocation Charges
Deducted from the premium paid, these cover initial expenses like commissions and administration costs.6. Policy Administration Charges
These fees are for maintaining the policy, providing statements and servicing the policy.7. Fund Switching Charges
The fees incurred when you transfer between different funds within the ULIP.8. Miscellaneous Charges
Other charges that can include service tax, communication charges, and more.What is the Difference Between Unit Linked Pension Plans and Traditional Pension Plans?
| Points of Differentiation | Unit Linked Pension Plan | Traditional Pension Plans |
| Investment Strategy | ULIPs invest in market linked funds like equity, debt, money market etc., as per the investor's choice. | Traditional pension plans primarily invest in more secure fixed income options like g-secs bonds, etc. |
| Returns and Risks | Returns depend on market performance, thus offering the potential for higher returns but with the associated risk. | Since they invest in more stable instruments, the risk is much lower as compared to ULIPs, at the same time, the potential for returns is also lower. |
| Flexibility | ULPPs offer more flexibility as the policyholders can choose and switch their investment funds as per their risk appetite. | Since the investment strategy in traditional pension plans is predetermined by the insurance company, these offer no flexibility in terms of investment. |
| Transparency | More transparency as the policyholders can track the performance of their funds. | No transparency in terms of investment strategy. |
| Withdrawal Options | Offer partial withdrawal or systematic withdrawal plans (SWP) after the lock in period. | Has restrictions on withdrawals, and premature withdrawals might have penalties. |
| Lock In Period | They have a lock in period of 5 years. | Generally, the concept of lock in period does not apply since you can never freely access the funds. The only option is surrender/partial surrender that comes with its own penalties. |
FAQs About Unit Linked Pension Plans
Can I Make Partial Withdrawals from my ULPP Before the Maturity Date?
What Happens if I Don't Pay my ULPP Premiums on Time?
What is the Vesting Age in a ULPP?
Other Important Articles Related to Retirement & Pension Plans
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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