Deepak Yohannan, is the CEO of MyInsuranceClub.com, an online insurance price and features comparison portal.
Unit-linked insurance plans, or ULIPs, are financial instruments that combine insurance with investment. Used intelligently, ULIPs give you the best of both worlds. The annual premium that you pay has two functions: a small portion takes care of the insurance component, while the other larger chunk is diverted into investments. Through its dual functions, the ULIP allows the policyholder to not only provide for the beneficiaries in the event of death, but also save for future financial goals.
Insurers offer a wide range of policies to suit different individuals, each of whom will vary in terms of financial needs, investment goals and risk appetite. When shopping for a ULIP, it is crucial to keep all of these factors in mind in order to make the right choice.
Selecting the right ULIP based on risk appetite
If generating high returns is a priority, one should opt for an aggressive equity-based ULIP. The risk here is medium to high depending on the market outlook, but it gives the best returns on investment.
Individuals with a lower risk appetite should go in for debt-based ULIPs. These invest in relatively safer instruments such as corporate bonds, government securities and other fixed-income instruments.
These offer a mix of both equity and debt funds and allow policyholders to use the fund switch feature effectively. They can use this to rebalance their equity-debt allocation as the markets go through various bull and bear phases. Of course, when maturity nears, policyholders can switch to the safer debt instruments.
Selecting the right ULIP based on investment goals
- ULIP for retirement planning
The policyholder accumulates a fund value that becomes available on maturity to be diverted into a suitable annuity plan.
- ULIP for child’s education
These policies allow for goal-based financial planning, giving the policyholder access to the required sum in time to fund his/her children’s higher education (or other goals).
- ULIP for building a corpus
ULIPs can be used in wealth creation as they allow policyholders to tap the market effectively in order to generate good returns.
- ULIP for healthcare contingencies
Some ULIPs allow policyholders to make claims against the policy’s fund value in case of medical expenses. These can complement one’s existing health insurance plans.
Additional points to remember
Recent months have seen a surge in ULIP surrenders (a rise of 20–25% in the quarter ended March 2014) as policyholders rushed to cash in on the bull market. This is a mistake, as ULIPs show genuinely good returns only over the long term.
The ULIP should not be your primary life insurance policy. But if you already have basic life insurance in place, the ULIP could help you in your wealth creation goals.
Annual premiums of up to Rs 1 lakh are tax-deductible under Section 80C, but do not let the taxman dictate your ULIP purchase. Let your financial goals and current income guide you instead.
Look for plans with low charges. There are a number of charges which are levied on the premiums you pay – premium allocation charges, fund management charges, policy administration charges are the most important ones. We now have online ULIPs which do away with most of these charges and are almost comparable with mutual funds.
