THE introduction of unit-linked insurance plans (ULIPs) has been, one of the most significant innovations in the field of life insurance over the past several decades. With the help of one product category it has addressed and overcome several concerns that customers had about life insurance –be it liquidity, flexibility or transparency.
Prior to the introduction of ULIPs, different goals of an individual were addressed with separate products. However, ULIPs are one stop solution for an individual's financial goals that are designed to enable consumers plan and fulfill all their long term financial goals, be it child education or marriage, wealth creation or even creating a retirement kitty. ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one's specific needs, offering unprecedented flexibility and transparency.
Why invest in ULIPs
Traditionally, the policyholder had no control over asset allocation, so it did not, necessarily, match the consumer's lifestyle. Further, often, people wonder whether it is better to purchase separate financial products for their protection and savings needs. This may be a viable option for those who have the time and skill to manage several products separately. However, for those who want a convenient, economical, one-stop solution, ULIPs are the best bet.
ULIPs by design encourage long-term systematic and disciplined savings towards specific financial goals like -– retirement, child's education or marriage, wealth creation along with providing them protection. To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, let us take the example of a 35-year-old man with two young children.
With a premium of Rs 30,000 per annum, he could begin with a sum assured of Rs 5 lakh. The balance could be invested in a fund of his choice, possibly a balanced or growth option. As the children grow, he might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up.
As sound investment instrument, ULIPs take both risk and return potential into account. By investing across several asset classes it adds diversification to help manage risk. The underlying principle of asset allocation, therefore, lies on the fact that when an investor diversifies across asset classes, he gives himself the margin or flexibility to counter market uncertainties.
Key features of ULIPs:
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Charge structure
It is a common myth that ULIPs are expensive financial products, instead it is a competitively priced product over a long term. The initial charges could be high, owing to the long term nature of the product. However, overall charge structure for the term comes down substantially over a long period of time. ULIPs also have a very competitive fund management charge in the industry. ULIPs are as transparent as other market-led investments. Every time the customer chooses a ULIP, he/she is provided a sales benefit illustration that explains the premium utilization and charges, year by year, for the term of the plan.
ULIPs also provide customers the freedom to switch between funds at no extra cost as against other market linked investments in which the customer bears the entry load (and even exit loads in some cases) for moving from debt to equity fund or vice versa.
Additional attractive features of ULIPs
Flexibility and transparency are the two key features of the product. Most ULIPs provide options to increase or reduce premiums after three years. While discontinuing premium payment is not conducive to long-term wealth generation, ULIPs, with their low or nil surrender charges, are customer-friendly and allow withdrawal of fund value in emergencies. ULIPs also provide an option to 'enhance' the kitty using top-ups that add to the existing fund value.
Through ULIPs, consumers can also decrease or increase protection over the term of the plan, as the protection needs of an average customer changes over his/her lifespan. Further, they offer the flexibility to add health insurance coverage by adding critical illness riders. Most ULIPs also offer customization whereby the customer can enhance or reduce or even totally drop such additional insurance covers during the term of the product. From a tax perspective, the premiums paid and the maturity proceeds from ULIPs are generally tax-free.
All these benefits rolled into one single product category is available only with ULIPs, making them an attractive 'wealth management-financial protection' solution. To sum up, ULIPs are unique as they automatically help policyholders enter into a systematic investment process besides providing the benefit of a life cover.
