Authored by Vivek Jain
Unit-linked insurance plans (ULIP) have been in the spotlight for years and usually for the wrong reasons. High commission structure for agents, mis-selling and high-cost structure have primarily been the cause for concern among investors that discouraged them to invest in ULIP for achieving their goal of wealth creation.
While ULIPs were once reserved as high-cost structure products, this shouldn’t hold back the investors now from planning for their life goals by investing in ULIPs.
The Insurance Regulatory and Development Authority of India (IRDAI) and the industry have made it easier to invest in ULIPs by addressing the investors’ concerns in terms of low-cost and investor-friendly products.
ULIPs Are Costly
When ULIPs were first introduced in the market, they were positioned in a manner that suited to distributors more than customers. Prior to the intervention of the Insurance Regulatory and Development Authority of India (IRDAI) in 2010, a major percentage of the premium paid by customers went towards charges of policy administration, premium allocation and fund management.
Regulations by the IRDAI have led to the capping of costs that were earlier charged by insurance companies. As opposed to the earlier charges that ranged from 6-10 percent, insurance companies now charge as low as 1.5-2 percent including Fund Management Charges that are capped at 1.35 percent while all other charges are minimal or completely eliminated.
In addition to this, widespread digitization has resulted in intermediary charges like policy administration and premium allocation being completely eliminated, thus making ULIP a wonderful investment product, one which consumers can trust their money with.
ULIPs Carry High Risks
Many people misconstrue ULIPs to be a risky investment. This is because they believe the premium paid to buy ULIPs is invested in equity funds only. What they do not know is that the money invested in ULIPs is allocated to various funds depending on the risk appetite of the consumer.
The investors are asked about the level of risk they are ready to undertake and also informed about the switching options that can be availed to make judicious use of their funds depending on the volatility of the market. ULIPs also allow the investors with the option of free switches in order to switch money in debt instruments in volatile markets.
However, over the long term, markets do tend to give a 12-14 percent return. New age ULIPs also offer ROMC, where mortality charges also get returned at end of policy term. Risk-averse customers can choose from a range of debt instruments, government securities and corporate debt instruments that are low in risk and give moderate returns.
ULIPs Yield Low Returns
Most investors tend to identify ULIPs as synonymous with traditional endowment plans. This causes them to refrain from putting money in ULIPs, fearing low returns. It is necessary to understand that in ULIPs today, only a minimal percentage of the premium is allocated for payment of the insurance cover, leaving a substantial portion to be invested to earn returns.
The quantum of returns, however, depends on the risk appetite of the investors. The nature of returns earned on ULIPs over the past five years is very high.
ULIP’s Life Cover Decreases if the Market Dips
Just because ULIPs are generally linked to the equity market, it does not mean that the life cover will decrease if the market plunges. The life cover does not get affected by market fluctuations at all. If you are no more, your existing ULIP policy will either pay the total life cover or the fund value, whichever is higher, to your beneficiaries.
It is Not Easy to Exit a ULIP
It is important that you purchase a ULIP only medium to long term goals. To encourage disciplined savings for these goals, ULIPs come with a lock-in period of five years after which you have the option to surrender your existing policy. If you make a full withdrawal before the policy matures, you will not incur any surrender or exit load charges; rather, you will be paid your fund value.
However, it’s not a good idea to surrender the policy midway unless you have no other source of funds. ULIPs require you to remain invested for the long-term if you want to reap maximum returns through capital appreciation. In fact, the power of compounding will typically kick in only if you stay invested in a ULIP in line with your life goals defined at the time of purchasing policy.
Vivek Jain is Head-Investments, Policybazaar.com. Views are personal