The Indian Insurance industry is growing not only in new providers entering the market but also the number of new policyholders which has grown exponentially after the reforms. Policyholders have a choice of insurers who offer innovative plans that are suitable for the discerning policyholders. Some of the plans are well received by the policyholder – for instance, ULIP
What is ULIP?
ULIP was first introduced in India by Unit Trust of India 1989. Unlike traditional endowment plans, ULIP is transparent. All charges like allocation charges etc. are clearly stated upfront. Policyholders have the flexibility to switch their investment between debt and equity without the hassle of running around. They can manage their investment by defining their investment and protection and per their individual choice.
In its simplest form, this is a unique insurance plan that is linked to the capital markets. One part of the collective fund from policyholders is earmarked for the policy premium, and the other part is invested in qualified investment instruments like stocks, bonds, and mutual fund.
However, ULIP is not as simple as it looks. In fact, a large number of policyholders do not know what ULIP is. ULIP policy offers insurance cover, tax saving under a single integrated insurance plan as well as an investment instrument. ULIP is one of the better selling insurance products all over India.
How do ULIPs Work?
The premiums collected from investors is put into a fund and invested in different types of funds selected by the investors who have different wealth creation goals. The expenses and the premium portion are deducted, and the accumulated amount is invested by knowledgeable Fund Managers. After completing all the investment, division of the corpus is done into different units with a face value assigned to them.
These units are called NAV (Net Asset Value). Investors are assigned units depending on the value of their investment. NAV is an indicator of whether your investment is doing well or not. At the time of maturity, the insurer pays the current fund value of the investor. In case, the policyholder is no more the company pays the assured sum, the value of the fund or benefit from death – whichever is higher is paid to the nominee mention in the insurance document.
Key Features of ULIP
There are different types of ULIP available in the Insurance. Every Insurer offers some form of ULIP with some variations to make their product unique. Generally, these ULIP are broadly classified depending on the needs and goals of the investors. Given below are the major types of ULIP available to the policyholder.
Your Investment is Secure
These plans not only offer comprehensive insurance coverage but it also gives you the opportunity to generate wealth by your investment in Equity, shares, and bonds. This is one of the main reasons that make this plan for ideal who want to make the safe investment and get cover as well.
Apart from insurance coverage and investment opportunities, ULIP is also eligible for income tax benefits under 80C of the Indian Income Tax Act. Premiums paid under ULIP are exempt from income tax.
Your Financial Transactions are Transparent
All transactions by ULIP are transparent. There are no hidden charges and all investors are aware of the allocation charges, fund management charges, policy admin charges, and other miscellaneous charges. The ULIP brochure also mentions the charges upfront. The ULIP also offers a free look period so you can be sure of all the terms and conditions before investing your hard earned money
You Are in Control of Your Investment
ULIPs offer greater control of your investment compared to traditional insurance products. They have the flexibility to manage their insurance and investment according to their need, individual preferences and any other requirements. Investors are also allowed to switch their investments between a debt fund to an equity fund and vice versa – without any extra charges.
Withdraw Your Money Any Time
Your money is available in case of any personal emergencies or any payment that is due. Investors can withdraw some part of their investment after a predetermined lock-in period. The best part is that these withdrawals are tax exempt.
Long-Term Investment Benefits
ULIPs are ideal as long-term investments. However, one should consider the market fluctuations and volatility of the market and its effect on their returns in the short run. ULIPs are ideal if you can wait for a longer time – so that you get a higher return on investment. Under these plans, you can keep your investment or a long-term which makes it easier increase your wealth.
ULIP plans offer majority benefit if the insured survives the term of the policy. Maturity value is equal to the fund value on the date of maturity. Some insurers also offer additional benefits depending on the types of ULIP plans, term and conditions.
Types of ULIP Available in India
Numerous types of ULIPs have been launched since the introduction of these plans. This was required since different investors had different investment goals. Some of the types of ULIP plans are described below.
- ULIP for Wealth Generation
These types of plans are ideal for investors who have a set plan to build their wealth within a definite time frame. Investors should be in their early thirties because they have the flexibility to fund their plans.
- ULIP for Medical Benefits
These investors are building up funds for medical expenses that might arise in the future.
- Building Funds for Children’s Education
These are designed for your child’s educational needs. The funds are available to the investor to sponsor the child’s education.
- Retirement Planning
These types of ULIPs are ideal for life after retirement. Premiums are paid for the duration of their working life to provide for post-retirement life.
- Wealth Generation Type of Plan
In this plan, the main objective is wealth generation.
- Mitigation of Risk
In ULIP plans, the funds are in various low-risk funds. This protects the fund against the various investment related risk. This is ideal for investors who do not want to take high-risk investment instruments for their hard earned money.
ULIP features total flexibility for investors. The insured can make changes to the plans life cover, change the premium amount to suit their budget and even choose fund options according to this risk appetite. Some of the changes the insurer can make include the following:
- Option to Select Live Cover.
These plans allow you to decide how much insurance cover you need.
- Flexibility to Change Premium Amount
This is one of the best features of the ULIP plans. The policyholder can change the premium midway through the policy term. This gives the insurer to make insurance premium depending on their financial capabilities. The premium can increase or decrease as per the insurer’s wishes.
- Premium Top-up
Premium top-ups are allowed when the policyholder wants to maximize their life cover or for higher returns. This is normally done when the market conditions are favorable.
- You Can Add Riders to Your Policy
You can add riders to your policy for an additional premium. These can be for medical expenses, funds for education or any other future expenses.
- You Choose the Fund Options
Under this plan, you can assign part of the premium as an investment in safe and profitable instruments of investment including bonds, equity, mutual funds, stocks, etc. The policyholder can select the fund options to invest their money.
Given the features and flexibility of ULIPs, it would make sense to consider these financial instruments as part of your financial planning.
Why Should You Buy ULIP Plans?
ULIP is an investment plan and should be given a favorable look. The reasons why you should buy ULIP plans are listed below.
Annual charges for ULIP plans are pretty low since the IRDA regulates it. The charges are between 2 to 2.5 % per annum for the first 10 years. Unfortunately, mutual funds are still the preferred investment instruments among a large section of the investors. However, the fact is that the charges by ULIP are on par with that of mutual funds.
With ULIP you can make changes to your investment options depending on your financial situation and the condition of the market. You can increase or decrease your investment depending on your risk appetite. Investors must realize that ULIPs are also affected by ups and down.
Apart from investment benefits you also get the option of enhanced riders for critical illness, accidental death, etc that takes care of your financial needs of you and your family
Lastly, Investors should take note that ULIPs are another form of investment that can be affected by the ups and downs of the market. Much thought should be given to any investment before you commit your hard earned money.