Subsequent to the Insurance Regulatory and Development Authority (IRDA) changing the guidelines last September to make ULIPS long-term products, the minimum lock-in period has gone up from three years to five years. As a result, some of the ULIPS — often termed limited pay ULIPS — now offer a limited premium-payment period of around 5-7 years. The core benefit of a limited pay plan is the possibility of enjoying coverage and remaining invested for a longer period even if the payment commitment is for a shorter period. Such a thought is appealing to a certain class of people.

Most companies offer plans where the insurance-seeker can choose a premium-paying term ranging from five years to 25 years. On the other hand, companies offer products that come only with limited pay options in order to eliminate confusion and help distributors meet the needs of insurance-seekers who are looking for such products. Policies with limited premium-paying terms work along the lines of single premium insurance plans. The premium to be paid over a period of, say, 15 years is compressed into 5-7 years in the case of limited pay ULIPS. Hence, in the case of a limited pay option, the premiums will be higher than the regular pay version of the policies.

The NAV-guaranteed policies are another similar category of ULIPs which are heavily promoted. In such policies a limited premium-paying period is specified and policyholders are promised the highest NAV (net asset value) clocked by their funds over a period of, say, seven years. The guarantee could also be in the form of a pre-specified NAV assurance (all guaranteed ULIPS come with the caveat that the insured stays invested until maturity). The premium-paying period in such ULIPS is shorter as the company would want to reduce the range for calculating the highest NAV. In ULIPS, capital guarantee products became popular post September 1, 2010, when the regulator introduced cost caps on the ULIPS. While some ULIPS promised to return all the premiums paid on maturity, it was capital guarantee in the form of the highest NAV that caught the fancy of investors.

A capital guarantee fund within the ULIPs has the flexibility to swing between equity and debt since their exposure to equity is 0-100 per cent. The highest NAV-guaranteed fund has the same flexibility—even as it may look like an equity fund, it is capable of turning completely into a debt fund in order to protect the fund. One of the key parameters that you need to consider when signing up for such plans is affordability as the premiums would be considerably higher when compared with regular premium-payment plans. This is done to ensure that the corpus available in the fund is higher. After the premium payment is stopped, the premium allocation charges will stop too. However, the administration and mortality charges will continue to be deducted from the fund with the fund continuing to participate in the market and benefiting from the remaining amount invested.

It is for this reason that the corpus should have enough funds to sustain future deductions and enjoy market participation. Policy-related charges also need to be factored in, as most policies front-load the charges in the initial years. Additionally, the tax aspect also needs to be taken into consideration. Since the annual premium would be higher than for regular policies, you need to ascertain if it exceeds 20 per cent of the sum assured (SA). In such a case, the deduction under section 80C will be restricted to 20 per cent of the SA. Besides, if the premium breaches this limit in any year, the maturity proceeds will not be exempt from tax.

Take Home: Insurance companies have a greater chance of loyal following if the premium range as well as the paying horizon of the policyholder is in line with what the customer wants. Experts are of the view that limited tenure payment plans generally appeal to those with fluctuating sources of income. So, for instance, an employee who is expecting a bumper bonus may wish to fulfill his premium commitments when the going is good and could opt for a limited pay plan. Before signing on the dotted line, one must understand that while the prospect of paying for a short term and enjoying the protection and other benefits over the long term seems beneficial, it may not be favourable for you. Hence, you carefully need to evaluate the various pros and cons before enrollment.