Insurance and investments make ULIPs smart choice for a safe future

There is a saying “Change is the only constant”. With time, everything changes and evolves. But, did you know the same can also be said in the context of Life Insurance Plans in India.

In the time of our parents,traditional plans like Whole Life Insurance, Endowment Insurance and Money Back Plans ruled the roost. However, we the millennial saw the launch of a new type of insurance plan in India called Unit Linked Insurance Plans or ULIPs.

Unit linked insurance plan is a market-linked Insurance product that aggregates the very best of investment and insurance into one. It is a plan which is linked to the capital markets and offers flexibility to invest, both in equity or debt portfolios depending upon your risk profile.

This exciting feature – Investments + Insurance of ULIPs brought about a revolution in the Insurance Market in India and it soon became the preferred choice of millennial.

This exciting feature – Investments + Insurance of ULIPs brought about a revolution in the Insurance Market in India | Picture Courtesy – Dishmaps

The data available on the website of Insurance Regulatory And Development Authority of India (IRDA) substantiates the above fact as the First Year Premium collected by ULIP policies grew by 12.62% in the FY 2015-16. Total premiums collected by ULIPs jumped to Rs 46,871.58 Crores in FY 2015-16 against Rs 41,617.80 Crores in 2014-15. ULIPs contribution of 12.77% to the total Insurance Industry premium really makes it a product of choice for those who seek wealth with protection plan insurance.

Therefore, there must be some unique features that have made ULIPs the preferred choice of investors. Before we learn the benefits of ULIPs, let us first understand how ULIPs work.

How do Unit Linked Insurance Plans work

[su_pullquote align=”right”]Unlike other policies, the premium paid in ULIPs are invested in a fund of your choice after deducting a small charge for fund management, policy administration and to pay the mortality charges for providing life cover.[/su_pullquote]

When you buy a ULIP plan, you pay the premium like any other insurance plan. However, unlike other policies, the premium paid in ULIPs are invested in a fund of your choice after deducting a small charge for fund management, policy administration and to pay the mortality charges for providing life cover. The value of each unit of a fund is determined by dividing the total value of the fund’s investments by the total number of units. For example – Sandip Sharma, a young professional buys a ULIP for annual premium of Rs 50,000 for 20 years, the plan will give him a life cover of Rs 5 Lakhs (Life cover should be minimum 10 times of the annual premium as per IRDA).

After charges are deducted, say Rs 2,000, the amount of Rs 48,000 is left (Rs 50,000 – Rs 2000) for investment in the fundhe has chosen. Suppose the fund NAV is Rs 13.25 on the day Sandip invested, so he will get 3,622.64 units(Rs 48,000/NAV of Rs 13.25). Now, say after one year NAV of the fund chosen by Sandip increases to Rs 14.50, then his total fund value would also increase to be Rs 52,528.28 (3,622.64 units x Rs 14.50). Similarly, if the NAV of the fund decreases the total fund value would also decrease.

Therefore, we can say that ULIPs offer life Insurance with wealth creation through a choice of portfolio based on your risk profile. This means, best of both worlds – Insurance + Investments – in one product!

Salient features of ULIPs

As we have already discussed, ULIPs are different from other Life Insurance plans as its bundles wealth creation and insurance into one. The following are some of the salient features that you must know before you invest in ULIP.

The beauty of ULIP is that you can choose a fund based on your risk profile | Picture Courtesy – TomorrowMakers

Choice of funds – While buying a ULIP, the Insurance Company offers you to choose from a variety of fund options. The beauty of ULIP is that you can choose a fund based on your risk profile. Let us see how?

[su_pullquote]Large cap can be suitable for investors wanting equity returns with a slightly lower risk. While investors with highest risk, mid cap funds could be the best choice.[/su_pullquote]

• Equity Funds – Equity funds invest primarily in the equity market and follow an aggressive investment strategy. The risk adjusted returns of these funds could be high and most suitable for those looking for long term wealth creation albeit with a high risk profile. Some Insurers even allow you to choose between various equity funds, like – Large cap, mid cap and diversified equity funds. Large cap can be suitable for investors wanting equity returns with a slightly lower risk. While investors with highest risk, mid cap funds could be the best choice.

• Debt Funds - Debt funds follow a conservative investment strategy. These Funds invest in various debt instruments, bond market and Government Securities and hence have a low risk strategy. Ideal for conservative investors, the returns from these funds, as obvious, are also conservative and low.

• Balanced Funds - Investors willing to earn returns higher than debt funds but are averse to the high risk strategy of equity funds can take a middle path by investing in balanced funds. These funds are a combination of equity and debt funds and follow a moderate risk investment strategy. While the risk is moderate the returns  are decent as it is superior than debt funds and lower than equity funds.

Life Cover – Since ULIPs are insurance plans, insurance cover is available and is expressed as a percentage or multiple of the premium paid. ULIPs offer life cover of minimum upto 10 times of your annual premium as per IRDA guidelines. In case of death, higher of the Sum assured or the Fund Value is paid. Thus, the life cover promised under ULIP is guaranteed to be paid to your nominee on your death.

No hidden charge – As we mentioned earlier, the premiums you pay would be subject to certain charges before they are invested in the chosen fund. These charges include the premium allocation charges, administration charges, fund management charges, mortality charges, etc. and are deducted every year or every month depending on the type of charge and policy terms. However, good thing about ULIPs are that the charges are transparent and specified when you are buying it. Therefore, there will be no surprises in future with hidden charges.

Switching facility – ULIPs provide unique switching facility. That means, switching your units partially or fully from one fund to another. Example: Sandip chose an equity fund when he started and the portfolio appreciated substantially after few years. To book profit Sandip might transfer part of his unit holdings to debt funds and thus lock the gains in a safer option. Most Insurers allow switching facility free of cost upto a specified number of times in a year.

Rebalancing your asset allocation – Now that you know about the switching facility provided by ULIPs, let us understand how it can help in asset allocation through an example – Sandip invested in a ULIP when he was aged 30 and considering his age took high risk by investing in the equity fund. After 10 years, with growing family liabilities and age, he thought of keeping not more than 50% of his portfolio in the equity fund.Therefore, Sandip can switch part of the equity fund profit to debt fund upto an extent that 50%-50% ratio is maintained. Likewise, if the equity market is not doing well, he can again switch part of the debt portfolio to equity fund to take advantage of the lower price of equities.This method can help Sandip get better returns without compromising on asset allocation.

Partial withdrawals – Unlike other Insurance plans, the unique part about ULIPs is partial withdrawals. The policyholder can withdraw the fund value partially to meet his financial requirements without hampering the plan continuity. Generally, the withdrawal can be made any time after completion of first 5 years of the plan.

Top-ups – ULIPs provides the facility of making additional investments into the plan through this facility. The policyholder can use this facility for further investment in the plan if he or she so wishes.

Tax benefits – Like other Insurance plans, premiums paid in a ULIPs upto Rs 150,000 in a FY qualifies for tax deduction under Section 80C of the Income Tax Act 1961.  Since ULIPs are insurance plans, the gains and maturity proceeds are also tax-free under Section 10(10d) of The Income Tax Act. However, to get the tax benefit, the life cover should be minimum ten times of the annual premium.

There is also no tax for switching within the funds or partial withdrawal after 5 years.

How to choose the best ULIP

With the range of ULIPs available in market, choosing the best is an onerous task. However, the following compiled list of parameters can help in judging the best ULIP from the ones available.

Charges – The first and the most important consideration is the ULIP plan charges. While, buying an ULIP plan, you must see the charges as needless to mention, lower the charges higher would be the premium invested and higher would be the resultant Fund Value. So, ULIPs with lowest charge structure will be the one you should look for.

Buy online – Online ULIP plans usually have lower premium allocation charge as no commission is paid out to any agent or broker. However, you should opt for this only when you understand the plan fully well and able to do everything yourself without help of the Company’s agent.

ULIP plans can be bought online too | Picture Courtesy – HDFC Life

Fund variety –Though there are three basic funds, companies have segregated these and offer various options under each of the fund options. You should select a plan with multiple option of fund choice as this will help you in rebalancing your asset allocation better.

Flexibility in premium payment and tenure – While paying premiums for the entire duration of the plan is the most ideal situation;some may want to pay a limited period premium while some prefer a one-time investment. While choosing a plan,check the plan chosen by you offers these flexibilities. In case of the policy tenure too, the plan should allow you a term selection which is in accordance with your financial planning goals.

Life coverage – Remember, this is very important as you can not avail tax benefits if the plan does not offer you minimum cover of 10 times of annual premium as mandated by IRDA.

Fund performance –You must look at the past performance of the ULIP plan and compare it with its peers. Though past performance is no guarantee for future returns, but it speaks lot about the ability of the fund managers to deliver future returns.

Customization option – Riders like critical illness, accident benefit and sickness are very good options worth considering while buying a ULIP plan. If you wish to avail any or all of the riders by paying a small premium, do check if the same is offered in your chosen plan.

Conclusion

We have seen why and how ULIPs have emerged as the most preferred choice for the insured. Potential of earning market linked return which is much higher than that of traditional plans + adequate life risk coverage makes ULIP the most attractive investment option.

ULIPs have emerged as the most preferred choice for the insured | Picture Courtesy – Its all about money

A difference of even 1-2% higher return in ULIPs can make lot of difference in the long run. Let us understand through an example – Sandip pays a monthly premium of Rs 10,000 in a 20 year ULIP plan and suppose the plan gives annual 8% return post adjusting all charges etc. His maturity value will be approx Rs 59 Lakhs after 20 years compared to traditional endowment plan, where he can get maximum Rs 46 Lakhs (assuming traditional plan gives a maximum of 6% return). Sandip is getting Rs 13 Lakhs more by investing in a ULIP Plan.

Therefore, we can conclude that the unique combination of insurance + superior returns on investments in ULIPs make your future safer and better.

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This article was sponsored by Star Union Dai-Ichi Life Insurance