Unit-linked insurance plans (Ulips) that offer premium flexibility and dynamic investment options are gaining popularity with risk-tolerant investors. Known as smart Ulips, there are no premium allocation and policy administration charges which are deducted from the insured’s premium, making them more cost-effective.
Smart Ulips provide customers with the flexibility to choose their asset allocation between equity and debt, depending on their risk appetite. A policyholder has the option to invest up to 100% in equity or debt. Moreover, many insurance companies do not charge for switching between the funds. And after the end of the five-year lock-in period, the policyholder can choose to withdraw the investments partially or fully.
With strategic planning, the wealth generated from smart Ulips can be earmarked for various long-term goals, such as funding a child’s education or securing retirement. Moreover, the tax efficiency amplifies the appeal of Ulips, positioning them as a comprehensive solution for those seeking not only financial growth but also a well-rounded approach to legacy planning.
Flexible premium option
One of the most important advantages of smart Ulips is its flexible premium payment option according to changing financial circumstances. Policyholders can choose between paying the premium monthly, quarterly, semi-annually, or annually. They can make additional lump sum investments (top-ups) into their existing policies and have the flexibility to switch between different funds —equity, debt or hybrid — to adjust their investment strategy based on changing market conditions or investment objectives.
Rakesh Goyal, director, Probus Insurance Broker, says smart Ulips are gaining popularity due to their combination of investment and insurance features, providing flexibility and potential for higher returns. Individuals may consider them for long-term financial planning and wealth accumulation. “The main differences between traditional Ulips and smart Ulips lie in their investment strategies and premium flexibility.”
Smart Ulips allow individuals to strategically invest in the equity and debt markets. Vivek Jain, head, Investments, Policybazaar.com, says their dual nature allows pursuing life goals, ensuring fulfilment whether one navigates through the policy period or goes beyond it. Moreover, new age Ulips carry an essential commitment to secure life goals and manage financial well-being both in the policyholder’s presence and their absence.
Examine the costs
Zero premium allocation charge: Previously, premium allocation charges were deducted from the premium to cover distributor commissions. With the rise of online Ulips purchases, many insurers have eliminated premium allocation charges, aligning with the diminished role of intermediaries.
Zero policy administration charge: Administrative charges associated with Ulips, covering paperwork and overhead costs, are now waived or significantly reduced by several insurance companies. Some insurers have done away with policy administration charges entirely.Return of mortality charges: Mortality charges, representing the cost of life insurance coverage, have decreased significantly in ULIPs. “Some insurers now offer plans with a return of mortality charges at the end of the policy term,” says Jain.
Fund management charges: Ulips encompass various funds, and insurers charge a percentage of the fund value for managing them. While these charges cannot exceed 1.35% of the fund value, they remain essential for insurers to manage costs effectively.
Factors to consider
Before investing in a linked-policy, investors must determine their financial goals, risk tolerance, and investment time horizon. Investors should verify the availability of the fund switching feature. This entails assessing the number of complimentary switches, associated switch costs, and the extent of flexibility offered within the plan. If an investor chooses to surrender their policy before the completion of the lock-in period, the insurer will impose surrender or discontinuance charges.
Sharad Bajaj, COO, InsuranceDekho, says investors must assess the flexibility features offered by smart Ulips, such as premium payment options, fund-switching capabilities, partial withdrawals, and premium redirection. “Investors must evaluate the range of investment options available within the smart Ulips, including equity, debt, balanced, and thematic funds, to diversify their investment portfolio according to their risk appetite and preferences.”
Investors should ideally opt for the Waiver of Premium rider to stimulate financial security while keeping the Ulip active. This feature serves as a shield for both investment and insurance benefits, especially during unexpected events like disability, critical illness, or the unfortunate demise of the policyholder. It ensures the continuity of premium payments by the insurance company under such circumstances.