ULIPs- (Systematic Insurance cum Investment Plan)
A ULIP is nothing but a market-linked insurance plan. There is a difference between a ULIP and other insurance plans viz the way in which the premium money is invested. Premium from traditional insurance plan or an endowment plan is invested mainly in risk-free instruments like government securities (Gsecs) and AAA rated corporate paper, while in case of ULIP, the premiums can be invested in stock markets in addition to corporate bonds and/or Gsecs. This option makes ULIPs an attractive investment for an individual. The following few reasons make ULIPs irresistible as an investment option -
Transparency
ULIPs provide a transparent option to customers for planning their various life stage needs through market-led investments as compared to the traditional investment plans.
Insurance cover plus savings
ULIPs serve 2 main purposes - of providing life insurance along with savings at market-linked returns. Hence, ULIPs can be termed as a two-in-one plan in terms of offering an individual the twin benefits of life insurance plus savings. This option is not available in comparable instruments such as mutual fund for instance, that does not offer a life cover.
ULIPs offer a variety of investment options unlike traditional life insurance plans. ULIPs generally come in 3 broad variants:
- Aggressive ULIPs (invest 80%-100% in equities and the balance in debt)
- Balanced ULIPs (invest about 40%-60% in equities)
- Conservative ULIPs (invest up to 20% in equities)
Such allocation of debt/equity varies according to insurance companies. An investor also has the option of choosing various options/funds available according to his risk appetite and return expectation.
Flexibility
Individuals may switch between the ULIP fund options in order to capitalize on investment opportunities across the debt and equity markets. Some insurance companies also allow a certain number of free switches. This is an extremely important feature which allows the investor to benefit from the vagaries of stock/debt markets. Switching also helps individuals as they can shift from an aggressive to a balanced or conservative ULIP as they are approaching retirement based on their risk appetite.
Works like a SIP
Rupee cost-averaging is an important benefit associated with ULIPs. The mutual fund industry offer SIP options to investors where in individuals invest their monies regularly over a period of time and in intervals of a month/quarter and don't need to be worried about `timing' the stock markets. It is important to note that these benefits are not peculiar to mutual funds only. Not many realize that ULIPs also tend to work in the same manner, albeit on a quarterly or half-yearly basis.
ULIP- Important considerations
When buying a ULIP, one must select the plan that best suits your needs. The important thing is to look for and understand the nuances that can considerably alter the manner in which the product works for you. Consider the following:
- Charges: A complete charge structure includes the initial charges, fixed administrative charges, fund management charges, mortality charges and spreads, and that too, not only in the first year but throughout the term of the policy.
- Fund Options and Management: One needs to understand the various fund options available and the fund management objectives of the scheme. Facts like who manages the funds, how much experience do they have, are there sufficient controls – need to be taken into consideration.
- Featres: Most ULIPs are 4really good in providing features such as allowing one to top-up and/or switch between funds, increase or decrease the protection level, or also premium holidays. The conditions and charges associated for such features should be understood. For instance, is there any minimum amount that must be switched? Are there any charges on the same?
- Company: Another important consideration is the brand that you are insuring with. The company must be trustworthy and should be in a position to honor its commitments as per your needs.
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