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ULIPs

 

For a lot of people, Ulip is still a four-letter word. However, investors need to wake up to the new reality. After Irda capped the charges and introduced new rules for Ulips in 2010, these plans have become more customer-friendly. An ordinary Ulip is still a costly proposition, but the online avatar of these market-linked insurance plans is a low-cost version far removed from the one mis-sold to investors a few years ago. The Click2Invest plan from HDFC Life, for instance, charges only 1.35% a year for fund management. The only other deduction is mortality charge for the life cover, while the rest of the premium is invested. The iGrowth plan from Aviva Life Insurance charges 1.21% a year for a 20-year policy with an annual premium of over `1 lakh.

While the low charges are a big advantage in the long run, experts say one should not go by cost alone. Don't buy a Ulip only because it has low charges. The performance of funds should also be taken into consideration. That's true. If you save 2-3% on cost by investing in an online plan, but the funds underperform by 4-5%, you will be a net loser.

Ulips have not done too badly in recent years. Ulip funds with an aggressive allocation (50-75% of the portfolio in stocks) have risen 28% in the past year (see graphic). However, these returns reflect only the rise in the fund's NAV. The returns for the investor may be lower because some of the monthly charges levied by Ulips are by deduction of units. So, if you started the year with 5,000 units of a fund with an NAV of `20, your corpus would be `1 lakh. If the NAV rises to `25 by the end of the year, your returns may not be 25% because some units may have been deducted. If 100 units have been deducted, your returns will be lower at 22.5%. Keep this math in mind when looking at the returns from Ulips.

Even so, these can be used as a rebalancing tool by the savvy investor. The switching facility in a Ulip allows the policyholder to switch from equity to debt, and vice versa, based on his reading of the market.

There is no tax implication on such switches and the process is fairly simple.

Online access has made it even easier.

Though financial planners frown on this combination of insurance and investment, they feel that Ulips are a better option for those who are reckless with money. If a spendthrift invests in an ELSS fund, he is likely to withdraw after the lock-in period and blow it away. Ulips have a lock-in period of five years and one is forced to invest every year.

Buy a Ulip only if you can pay the premiums for the full term and take one for at least 15 years. A short-term plan may not help recover the high charges in the initial years.

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