ULIP Type II

A ULIP's death benefit is not one rule. It depends on the wording of the contract.

The workbook lists the possibilities. On death, the beneficiary receives the sum assured. Or the net asset value. Or the higher of both. Or the total of both.

A Type II ULIP is that last one. On death before maturity it pays the sum assured and the fund value.

On maturity it pays the fund value alone.

So the two halves of the policy stay separate on a death claim. The cover does not eat into the savings, and the savings do not stand in for the cover.

That is why the workbook picks a Type II plan when it wants to compare a ULIP fairly against a term policy plus a mutual fund. Both routes then deliver the same two things: the full cover and the accumulated pot.

Any other structure would hand the term-plus-fund route a built-in advantage, and the comparison would prove nothing.

The definition, section 2.3. The workbook defines it inside the case study, in a parenthesis: a Unit Linked Insurance plan of type II means on death before maturity the ULIP will pay the sum assured amount plus the fund value; on maturity the fund value is payable.

The family it belongs to. The same section says that in the event of death of the insured, the sum assured (or net asset value or higher of both or total of both, depending on structure of the policy) is paid to the beneficiaries; if the insured survives the insurance period, the net asset value is returned. Type II is the "total of both" branch of that sentence.

The case it was chosen for, section 2.3. Mr Jeevan, aged 35, needs life cover of Rs 100 lakhs over a tenure of 20 years. A term life premium is Rs 1,100 per month. He can invest Rs 25,000 per month for 300 months (25 years). No tax benefit is sought on the investment amount.

The two options cost the same Rs 26,100 a month, and because the ULIP is Type II both pay cover and savings on death. That is the only basis on which the comparison is fair.

One inconsistency in the assumptions. The case study's assumption block states a tenure of 20 years for the life insurance policy, while the investment period is given as 300 months (25 years) and Option 2's policy term is stated as 25 years. The workbook does not reconcile the 20 and the 25. The comparison itself is worked on the 25-year figures.

Why Type II matters for the tax answer, section 2.3, row 7. The tax row of the same comparison turns on the annual premium, and the numbers are exact.

• If the sum assured is at least 10 times the annual premium, no tax is payable on the maturity value. In this case the maturity value is exempt, because the sum assured of Rs 1 crore is higher than 10 times Rs 3,13,200.
• But the Finance Act, 2021 provides that maturity proceeds of ULIPs with an annual premium of more than Rs 2.5 lakh shall be treated as capital gains and taxed accordingly — and this applies only to policies taken on or after 1 February 2021.

So the workbook's own example fails the newer test by a wide margin: Rs 3,13,200 exceeds Rs 2.5 lakh. The workbook says as much when it concludes that the lack of flexibility and lower transparency of the ULIP is balanced somewhat by the better tax treatment of its maturity value for policies issued before February 1, 2021. Read that qualification carefully — it is the difference between the comparison the workbook works and the comparison an adviser faces today. The rules for a policy over that premium line are in high value ULIP.

What the comparison concludes, section 2.3. Both options look comparable on the assumption that the insurance cover is required. If it is not, the mortality charge in the ULIP becomes an additional cost. The workbook's summary is one sentence: a ULIP should be considered in place of a term policy plus mutual fund only where insurance cover is required in the first place.

The case below is the workbook's own, from section 2.3.

Mr Jeevan is 35 and needs Rs 1,00,00,000 of cover. He puts Rs 26,100 a month — Rs 3,13,200 a year — into a Type II ULIP with a sum assured of Rs 1,00,00,000 and a policy term of 25 years.

Suppose he dies in year 18, with a fund value of Rs 62,00,000. What his family receives depends entirely on the structure:

The Rs 62,00,000 of spread between the Type II answer and the sum-assured answer is not a difference in premium, performance or cover. It is a difference in one clause of the contract.

Now compare the workbook's two options at the same death event.

Identical — which is exactly why the workbook chose Type II. Had it used a higher-of structure, Option 2 would have paid Rs 1,00,00,000 against Option 1's Rs 1,62,00,000, and the comparison would have told us nothing about ULIPs.

And if he survives to maturity. Type II pays the fund value alone, whatever that has become. There is no sum assured on survival.

The tax test, on the workbook's own figures.

Annual premium                    Rs 3,13,200
10 x annual premium               Rs 31,32,000
Sum assured                       Rs 1,00,00,000   -> comfortably above 10x
   => maturity value EXEMPT on the 10-times test

Finance Act 2021 threshold        Rs 2,50,000 of annual premium
Annual premium                    Rs 3,13,200      -> ABOVE the threshold
   => for a policy taken on or after 1 February 2021,
      the maturity proceeds are treated as CAPITAL GAINS

The policy passes the old test and fails the new one. The workbook is explicit that its favourable tax conclusion holds for policies issued before 1 February 2021.

Chapter 2 (Features of Life Insurance Products), section 2.3, defines Type II inside the Mr Jeevan case study and gives every figure: age 35, cover of Rs 100 lakhs, tenure 20 years, term premium Rs 1,100 a month, investment Rs 25,000 a month over 300 months, and Option 2's Rs 26,100 a month into a Type II ULIP with a 25-year term and a Rs 3,13,200 annual premium. The same section lists the four possible death-benefit structures, and row 7 of the comparison gives the 10-times test, the Finance Act 2021 Rs 2.5 lakh threshold and the 1 February 2021 cut-off. The module-end questions for the chapter include one on why a ULIP premium is higher than a term premium for the same sum assured.

Expect a question asking what a Type II ULIP pays on death, and a comparison question on why the workbook uses a Type II plan rather than any other structure when setting a ULIP against a term policy plus a mutual fund.

• Type II pays sum assured PLUS fund value on death, and fund value ALONE on maturity. Both halves of that sentence are examinable, and candidates often carry the "plus" across to maturity.
• "Higher of both" is a different structure. On the workbook's figures that pays Rs 1,00,00,000 where Type II pays Rs 1,62,00,000 — the same premium, the same fund, a different clause.
• The workbook chose Type II to make the comparison fair, not because it is the standard structure. Its own sentence lists four possibilities, depending on the structure of the policy.
• The two options in the case study cost the same Rs 26,100 a month. Rs 1,100 + Rs 25,000 against Rs 26,100 is the whole design of the comparison.
• Rs 3,13,200 is the annual premium, and it is the number both tax tests are applied to: comfortably inside the 10-times rule, and comfortably outside the Rs 2.5 lakh rule.
• The workbook's favourable tax conclusion is expressly limited to policies issued before 1 February 2021. Do not carry it to a policy taken today.
• The assumption block says 20 years while the options run 25. The workbook states both and reconciles neither; the worked comparison uses 25 years.
• A ULIP replaces term-plus-fund only where cover is actually needed. That is the workbook's stated conclusion, and the reason is that the mortality charge becomes pure cost when the cover is not required.
• Minimum sum assured rule and the tax 10-times test share a number and are different rules. One is IRDAI's product-design floor; the other is a condition for exemption.