ULIPs have higher costs associated with it in the initial years because of the policy charges. Also, market fluctuations will tend to provide lower amount of returns as the amount invested would be slightly lesser in the first couple of years in the policy. However, overall charge structure for the term comes down substantially after the first few years with more funds allocated in the chosen funds.
With the changing financial scenario, more and more people are curious to know the intricacies of various financial instruments that are there for the picking. One such investment instrument is a United Linked Investment Plan (ULIP). Here are the answers to some of the common questions asked with regard to ULIPs.
What is a ULIP?
A United Linked Investment Plan (ULIP) is an instrument which combines the security provided by an insurance plan with the opportunities provided by an investment plan.
What are its features?
In ULIPs, a part of the investments made by the investor is used to provide life cover to the investor and the remaining amount is used to make investments in a unit fund.
The allocated (invested) portions of the premiums after deducting all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. A Unit is a component of the Fund in a Unit Linked Policy. As in mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. The value of investments made in the ULIP alters with the performance of the underlying fund opted by you.
ULIPs also offer features that no other investment instruments offer. ULIPs offer features such as:
- Top up
- Switch between funds
- Increase or decrease the protection level during the term of the policy
- Cover continuance option
- Surrender options
- Range of riders which can be attached to the main policy to provide you added protection
ULIPs also provide you with tax benefits. ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds true, irrespective of the nature of the plan chosen by the investor.
What are the types of funds offered in a ULIP?
The majority of insurers offer a number of different funds to suit an investor’s financial objectives, risk appetite and time objectives. The risks associated and the amount of returns associated with each type of fund is different. The most common funds offered are:
- Equity Funds
- Income, Fixed Interest and Bond Funds
- Cash Funds
- Balanced Funds
What aspects of ULIP should you watch out for?
When you look at the approved sales brochure before taking up a ULIP policy you should keep an eye out for the following details:
- All the charges deductible under the policy
- Payment on premature surrender
- Features and benefits
- Limitations and exclusions
- Lapsing and its consequences
- Other disclosures
- Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council
Are ULIPs good for long-term investment or short-term investment?
ULIPs are considered to be better for long-term investments because of the following reasons:
Higher product costs in the initial years – ULIPs have higher costs associated with it in the initial years because of charges which go towards the policy charges. Also, market fluctuations will tend to provide lower amount of returns as the amount invested would be slightly lesser in the first couple of years of the policy. However, overall charge structure for the term comes down substantially over a long period of time thus allowing greater allocation of your premium in the chosen funds.
Market Fluctuations – Market fluctuations can hamper returns in the short-term. However, long-term, market linked investments not only yield very attractive returns, but also have the least downside to them. To get the best out of your ULIP, you should remain invested in the ULIP for the long-term of at least 6-10 years.
What is better? ULIP or Term Insurance?
The answer to this question lies in the expectation we have from our insurance plan. If our objective of investing in an insurance plan is only to provide life cover the term insurance makes sense. However, with term insurance, at the end of the policy term is reached in your lifetime, you get no returns. Essentially, all the money that you have paid towards the premium gives you no return. However, if the same investment was down in a ULIP, you would have life cover as well as a sizable amount of returns.
What are the advantages and disadvantages of ULIPs?
| Advantages | Disadvantages |
| Flexibility – you can choose your term, insurance cover, pay premiums for a limited period | Flexibility – this can act a disadvantage since the person may use the withdrawal and may not end up building a huge corpus |
| Transparency – you know what is the amount you are paying for the various benefits | Initially heavy costs – You pay around 15-40% for the first year and then around 5%for the next two years |
| Tax free returns – 100% tax free since they are received from insurance and it is a contract | No control on costs |
| Switch between various options | One may try to time the market and may make errors |
| Tax benefits when investing under Sec 80C |
Higher cost initially means you start with a handicap. You do not get anything for nothing in the Indian financial market. The promise of lower long term costs are just that, until there is a proven track record, I would touch these products only with a 10 foot long pole. Better maike that 100 foot long!
Most of the companies reserve the right to charge higher fees without permission from the IRDA, the insurance regulator. It is best to opt for a term insurance plan for your insurance needs and a low lock in or no lock in product for your investment needs.
ULIPs (Unfriendly Loss-making Illiquid Plans) – they are no better than these.
I still regret buying them. I have pension plans from 2 major insurers. even in these I have paid huge upfront charges in the form of lower allocation. This money has been used almost entirely for paying commissions.
The flexibility (fund switching, partial withdrawals, etc.) that they (companies) highlight is unlikely to be used by you most of the time. Don't fall for this.
Fund NAV's are declared post deducting fund management charges. So what you should do is look at the invested amounts and how the money grew in terms of NAV. ULIPs are not better or worse than most mutual funds. Try tracking NAVs of ULIPs and funds for the same period.
Don't mix insurance and investments. Buy insurance (i.e. pure risk cover) from insurance companies. It is critical to purchase insurance. Most Indian's are swayed by nonsense like "I do not get anything back". You are paying a price for someone taking a risk of your dying, having an accident, etc. There is a cost to that. That is what you are paying when you buy pure term insurance, please stick with it. The guy who wrote this report has scant understanding of
The only good part about ULIPs is they bind you into regular long term saving. However, you can easily do the same with SIPs in MFs. So stay away from ULIPs and focus on wealth creation.