The Complete Guide to ULIPs

Mar 01, 2013
Unit-linked insurance plans combine the benefit of mutual funds and insurance. Here’s how.

Insurance products can be broadly classified into three types: term plans, endowment plans, and unit-linked insurance plans.

The term plan gives you a risk cover on your life without any maturity benefit. The premium required to be paid for this plan for a given risk cover is the lowest amongst insurance plans.

An endowment plan gives the insured a risk cover on their life along with a maturity benefit, which can either be equal to the premium amount paid or a guaranteed fixed rate of return or a bonus declared annually but paid out at the end of the term.

But returns associated with endowment plans are generally on par with those offered by low risk/return investments such as fixed deposits as insurers strive to protect capital by investing in lower-risk assets such as government/corporate bonds and liquid instruments.

For individuals with a higher risk-bearing appetite, insurance companies launched unit-linked insurance plans (ULIPs) in 2005.

What are ULIPs?

The ULIP is an insurance plan where the investment amount is invested in the market, much like a mutual fund, and the risk is borne by the policyholder (The money paid as premium gets split into non-investible and investible amounts). Thus, it offers the policyholder a possibility to earn greater returns than an endowment plan.

Click here to read various charges that are levied in a ULIP.

While several ULIPs in the market may not have offered great returns in the last few years as returns from equities have remained choppy, it remains a good option for those with a higher risk-taking ability as long-term returns from stocks are generally higher than most other instruments.

Selecting ULIPs

But up until now, research on ULIPs existed in a very small way in the Indian market. Most insurance companies disclose only the NAV and the trailing returns of the fund on their websites, leaving potential policyholders with only their distributors’ advice on which ULIP to buy.

We have now launched the Morningstar rating for insurance funds, which would serve as the perfect starting point for the investor. The Morningstar rating (commonly called star rating), which has existed globally for mutual funds for several decades and which was introduced by us, is a five-scale measure of a fund’s risk-adjusted returns compared to similar funds, with five being the best and one being the worst. (Click here to know more about the Morningstar Rating for insurance funds).

As with the Morningstar Rating for mutual funds, we believe it serves as a screening tool to shortlist interesting funds worthy of further research.

Apart from the Morningstar Rating, investors now get access to other details about the fund’s portfolio and investment strategy, something that you could not get before.

Click here to get started.

Durgesh Savkur is Data Analyst for Morningstar India.

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