ULIP (Unit Linked Insurance Plan)  

ULIP is a scheme, which in addition to a life cover gives you an opportunity to make investments. It's a two in one plan that offers benefits of life insurance plus savings. In ULIPs, a part of the investment goes towards providing you life cover. The residual portion of the ULIP is invested in a fund which in turn invests in stocks or bonds; the value of investments alters with the performance of the underlying fund opted by you. It is critical to understand how money gets invested once you purchase a ULIP. When you decide the amount of premium to be paid and the amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product. The rest of the premium is invested in the fund or mixture of funds chosen by you. Mortality charges, ULIP administration charges and ULIP fund management charges are thereafter deducted on a periodic basis. Since the fund of your choice has an underlying investment – either in equity or debt or a combination of the two – your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity. Why investment in ULIP makes sense?Flexibility: You have an option to switch between the investment funds to suite the changing requirement in life. One can switch from high risk to low risk fund option. There is an added advantage of switching between funds, which offer different rations of equity, and debt, a few times without paying any extra fees. These options are designed to help you choose an option fitting your risk appetite, investment horizon, financial goals and life stage. Multiple Investment options: If you are a risk adverse investor and believe in goal based investing, ULIP is an ideal financial product where you can park your funds. Depending on your life stage, you can decide on equity and debt mix in your plan. Tax benefit: your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). Besides the premium, the maturity amount in ULIPs is also tax-free , irrespective of whether the investment was in a balanced or debt plan. Goal based investment: ULIP gives you a platform to plan for your child's education or child's marriage or your retirement needs. Since there is a life cover, in case you are not alive to take care of your family, your family financial goals remain intact and on track. The Flip side of ULIPs: High cost product: ULIPs are quite expensive, as most of the charges are recovered at the start of the tenure—usually in the first three years when your money is locked in. Insurers levy enormous selling charges, averaging more than 20 to 40% of the first year's premium, and dropping to 10% and 7.5% in subsequent years. So very little is actually invested during those years. Most investors discontinue early, or sign up for five- to 10-year terms, thus suffering high costs and poor returns. ULIPs make sense only if investments are made for a long tenure—say , 15 or 20 years—thus defraying initial costs. ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum locking of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years.Death benefit: In case of ULIPs, policy holders gets either the sum assured or the value of the units one holds, whichever greater, in case of death. In case of mutual funds + term insurance, one avails the benefits of both; fund value and the sum assured in case of death.ULIPS are subject to the vagaries of the market. Recently most of the ULIPs have under performed Nifty. ULIPS does not fit into for investors with active fund management. ULIPs are sold by agents promising very high return, which may not be achievable. Conclusion: It is always better to keep insurance and investment needs separate. A better alternative to a ULIP is a combination of low-cost term insurance and a direct exposure to equity / equity mutual fund. Term insurance provides coverage for a specified period and is amongst the cheapest insurance products. Its no-frills design only covers your life for a fixed period. Combining it with equity, balanced or debt mutual fund gives you the benefits of a ULIP at a much lower cost. In the end, your long-term returns are higher.