The debate over the utility and effectiveness of Unit Linked Investment Plans (Ulip) as an efficient insurance product, which also provides returns, has been raging on recently, ever since its 4G version came into the market early last year. Although, ULIPs in its ancient avatar may not have had the right ingredients to qualify as an investment engine, the same does not hold true for the same in its present version and fact-based scrutiny of ULIPs will clearly vindicate my stand.
In fact, through my writings in the past, I have attempted to highlight the evolved characteristics of this product, which give 4G ULIPs an edge over the existing investment products available in the market. While we have been trying to raise awareness around this product through our consumer education initiative called '
NiveshKarBefikar', and the industry has also led a few digital campaigns, the reality is that the product continues to be unfairly judged for its insurance capabilities, rather than its effectiveness as an investment product.
The fact of the matter is for any investment product, a sum assured of 10 times the annual premium, cannot give enough life insurance cover. Now, it's unfair that certain investment ‘pundits’ are hammering this product on its insurance capabilities rather than evaluating the same on a merit-based prism.
ULIP is for Investment: Let's set the record straight!
The question I want to address through this write-up is, “if the industry is committing a grave error by judging ULIPs for its insurance capabilities rather than as an instrument of investment, capable of meeting long-term financial goals of an investor?” and I think it is. Let me elaborate on why:
ULIP is all about return on investment; Insurance is all about creating a safety net
It is imperative to understand two key elements associated with insurance. Firstly, the purpose of insurance, which is to weave a safety net for the families of those purchasing it. Secondly, the ability of insurance product to insulate itself from the volatility associated with markets and giving an assured sum as a benefit at the moment of reckoning. However, when we analyze the inherent physiognomy of ULIPs, it does not resonate with insurance. ULIPs are affected by the market churn, which impacts the return on investment; they are also not bought from the perspective of weaving a safety net but focuses on long-term wealth creation.
Does the Industry Need to undertake a paradigm shift in how they view ULIPs?
Of course, they do. Even I did. While earlier I overlooked ULIPs as an effective investment tool, the new version of the plans and the benefits it offered compelled me to change my thought process.
Lack of transparency, rampant mis-selling, higher initial charges and over the top commissions for product distributors leading to a poor return on investment are the attributes associated with old generation ULIPs, which mushroomed during the late 90s and early 2000s and I would concede this fact without raising an eyebrow. However, what I refuse to accept is that the ULIPs as a product were bad. Just as industry needs to be patted on the back for the transformation of ULIPs today, we also need to take responsibility for designing a product, which went against all principles of investment and consumer interest, which gave it a bad name! Thus, it was the industry, which faltered and not the product. However, much has changed since then.
For starters, the fund management charge has been capped at 1.35 percent. The advent of the online ecosystem has meant that the premium allocation charges have been reduced to zero in many plans and many plans have waived off the mortality charge as well making them cost-effective.
Secondly, one cannot overlook the tax advantage. ULIPs are the only market-linked investment products which promise tax reliefs on investments as well as the returns generated. The premiums paid for the plan qualify as a tax deduction under Section 80C up to Rs 1.5 lakhs. Moreover, the most important tax benefit which you can get is on the policy proceeds. The returns generated and the policy benefits which you get, are completely tax-free.
While the Union Budget 2018 imposed taxes on long-term capital gains from equity, ULIPs are the only equity investment with an EEE benefit today.
There’s more in the box!
If during the policy term, your investment strategy changes and you want to switch to debt investments, ULIPs allow you tax-free switches as well.
With these improved features and benefits, I strongly believe that there must be a paradigm shift in the industry with regards to ULIP investments. For those who criticize ULIPs on account of the five-year lock-in period, it will be wise to recall Warren Buffet’s quote – ‘You can’t produce a baby in one month by getting nine women pregnant’, which clearly summarises the importance of giving time for the results to be visible.
Yashish Dahiya is co-founder & CEO,
PolicyBazaar.com Group of Companies.