By Manish Sangal
In an opinion poll, we had asked respondents in the age group of 23-25 years a simple question: If you were to buy an insurance scheme for yourself, what would that be, and why? Almost 90% of our young new recruits said they would be investing in unit-linked insurance plans (Ulips). One main reason cited was Ulips fulfilled two financial needs —the need for an insurance cover to tide over exigencies and also the need to create wealth to fulfil financial goals.
Young respondents were aware of the medium-to-long-term investment horizon (10-15 years or more) in an Ulip. These youngsters have age on their side and do not mind waiting for the Ulip to deliver the returns. In fact, Ulips have a minimum lock-in period of five years, which ensures that youngsters do not use this investment for immediate liquidity—it could be a sudden, intense urge to buy the Harley Davidson—but for fulfilling financial goals. The charge structure of Ulips has become very competitive and, in fact, the FMC (fund management charge) can be a maximum of 1.35%, which gives Ulips a distinct advantage over a mutual fund, where the average cost structure is 1.75-2.5%, depending upon the fund. Hence, over a period of six-seven years, Ulips are likely to outperform a mutual fund in terms of cost, assuming an identical fund performance.
Plenty of choices
In fact, Ulips offer a wide array of funds to choose from. Thus, this serves as an ideal vehicle for desired asset allocation as also re-balancing one’s portfolio as and when required during the tenure of the plan. The funds range from pure equity (large-caps, mid-cap, and mixed caps), pure debts, and balanced funds to liquid funds. If one has to balance his/her portfolio via the mutual fund route, they will have to put money in different funds, whereas in a Ulip, one plan can take care of all portfolio balancing needs within the same product. It provide a distinct advantage over mutual funds by way of offering switching options between funds. Multiple free switches in a year ensure that an investor in Ulip doesn’t have to pay every time she/he rebalances the portfolio to arrive at the desired asset allocation. Unfortunately, in a mutual fund, one may have to bear a cost for changing funds.
Also, Ulips combine life insurance protection with savings. In order to ensure that the Ulip plan provides tax benefits at the time of exit under Section 10(10)D, an investor needs to ensure that the death benefit at all times is a minimum of ten times of your annual premium. To enjoy the benefits, it is necessary to stay invested in Ulips till the term-end. Since Ulips invest in the equity market, the returns will be in line with the volatility of the stock market. This volatility can impact an investor adversely, if the investor has a low-risk taking appetite.
The writer is chief agency officer, Bajaj Allianz Life Insurance