The concept of ULIP has been introduced for those who wish to avail a mix of both insurance cover and higher returns on investment.
By Santosh Agarwal
Life insurance and building a respectable corpus are two goals that most of us set out to achieve early in life so that our dependents have enough to manage their lives. Gauging this general wish, insurance companies have devised several plans. Unit Linked Insurance Plan (ULIP) is one of them which has gained popularity over the past few years in contrast to the traditional endowment plans. Technological advancement has also played a role as now one can see all the available plans online, compare and buy the best suited.
There, however, exist some fears in peoples’ mind with regard to the possibility of decent returns in ULIPs because part of the premium money that insurance companies collect is put in a fund for insurance cover and the rest is invested in money markets, including share market which is unpredictable. Here, we will try to provide answers to questions such as: Is ULIP an insurance product or investment? Is it safe? For how long does one need to invest? What kind of returns can one expect?
ULIPs = Insurance + Investment
The concept of ULIP has been introduced for those who wish to avail a mix of both insurance cover and higher returns on investment. Although a substantial part of the premium money is invested in the money market, the companies have now developed expertise to insure that these investments don’t become a victim of vagaries of the markets, and ULIP investors gain decent returns. Also, ULIPs are not as complex and expensive as they may sound. However, investors must understand that in order to expect decent returns, besides the life cover, they need to remain invested in ULIPs for a long time as insurance companies invest the premium money in different market instruments such as stocks and debt to ensure good returns.
Following are a few reasons why you should put money in a ULIP:
# Choosing investment options based on risk appetite: Purchasing a ULIP policy allows one to choose the kinds of investments based on one’s ability to take risks. This means that the policyholder can make an informed choice while deciding between equity and debt funds. In addition, ULIP buyers get to choose the percentage of investment they would like to see invested in high-risk equity funds, funds that carry moderate risk and debt funds that give fixed rates of returns, thus, hedging against the vulnerability of the stock market.
# Free switch option: Most insurance companies allow ULIP investors to switch from one investment instrument to another on the foresight of market trends and expected returns. Most people with good knowledge of the market and the investment options available prefer to exercise this option after making an informed decision. It is not difficult to track the chosen fund’s performance of any ULIP as the insurance companies declare the net asset value of their funds periodically.
People like to switch funds based on market news available on various websites, opinions of their peers and their anticipation of profits and losses during the period. Optimizing the value of investments is the primary goal of switching funds from one to the other, either completely or partially. The number of free switches in a year may be unlimited in some ULIP products like the Edelweiss Tokio Life-Wealth Plus, Bajaj Allianz-Future Gain or four as in the case of Aegon Life-iMaximise Secure Plan, PNB MetLife-Smart Platinum, etc.
# Transparency: Investors like to know about the charges incurred, expenses involved and the costs that would be deducted before the rest of their premium is invested. In addition, they are also curious about information concerning the duration for which their investments would constantly be charged with administration expenses among other costs. ULIP products are transparent in this regard. Companies disclose details such as how much they are going to charge for the services they provide. Besides, guidelines issued from time to time by the Insurance Regulatory and Development Authority of India (IRDA) ensure better products for customers.
# Gaining by the power of compounding: It would be prudent to invest in ULIPs as a long-term option, considering the increased amount of interest earned owing to the power of compounding. Most ULIPs have a lock-in period – some three years, others five years. Withdrawing money after five years or more includes the benefits of the power of compounding with returns far exceeding the amount earned by only saving the amount in banks. Results of past five years of ULIP performance show returns varying between 15 per cent and 20 per cent depending on the funds invested in and the frequency of premiums paid.
# Tax benefits: Most people buy ULIPs as a tax-saving measure without realizing the inherent benefits involved in this kind of investment. Saving on income tax is definitely one of the advantages as one gets tax rebate on the premiums paid under Section 80C and the payouts exempt from tax calculation under Section 10D of the Income Tax Act, 1961.
# Necessary life cover: ULIP products are sold by life insurance companies. This means that every investment in ULIP comes with a guarantee of protection in case of death of the insured. Though cynics may argue that the extent of life cover available in ULIPs is not as high as may be provided by investing in term insurance plans, the fact that it ensures a cover in times of sudden death cannot be ignored. Investing in ULIPs is more than mere insurance; it is a viable avenue that provides greater scope for support to the family of the insured.
The mortality charges paid for by the investor ultimately boil down to zero as the insurance companies like the Edelweiss Tokio Life-Wealth Plus puts back more into the fund than what they what they charge. This means that the life cover assured to the client is basically free of any kind of cost, hence, indicating ULIP as a unique investment option with free life cover. With the Edelweiss Tokio Life-Wealth Plus leading the race when it comes to drastic reduction of charges involved, other companies are also expected to follow in near future.
To see money grow, it is necessary to invest. Saving money in bank accounts or age-old deposits neither ensures quick growth in wealth nor acts as an effective shield against the growing tax rates. The fact that ULIPs provide scope of both insurance and investment under one umbrella means security combined with growth, both of which being essential keeping in mind the fragility of human life.
(The author is Head of Life Insurance, Policybazaar.com)