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ULIPs Investment for protection and savings

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Fulfilment of long-term financial goals with one's existing income, given the constant challenge of inflation, makes financial planning a daunting task.

Let us take the scenario of Prakash, a working professional, and his wife Sonali, a homemaker. Prakash aspires to provide the best to his family and has long-term financial goals too. How can he fulfil them? Regular savings in a bank or a recurring deposit will not beat inflation. One avenue for generating inflation-beating returns is the capital market. However, he does not have the expertise or time to monitor and manage his funds.

How can he then look to achieve his long-term goals? The solution to this is a Unit Linked Insurance Plan (ULIP).

So what are ULIPs?

ULIPs are life insurance products which provide individuals life cover and help them save systematically to build a corpus. Additionally, the premiums and maturity amount get tax benefits u/s 80C and 10(10) D respectively, of the Income Tax Act.

How do ULIPs work?

Prakash purchases a ULIP, for a monthly premium of Rs. 20,000/- with a life cover of Rs. 24 lakhs. He can choose allocation of the premium into debt, equity or both, depending on his risk appetite. In case of his death Rs. 24 lakhs will be paid to Sonali (assuming she is the nominee). If all goes well, Prakash will benefit from the potentially superior returns offered by the capital markets over the long term. He even has the flexibility to switch the premium allocation as his age progresses. A few ULIP products offer an automatic re-balancing based on the age of the individual. This eliminates the worry of having to change it periodically.

ULIPs are market linked products and meant for individuals with a long term horizon. One needs to understand that volatility is an integral part of the markets and regular premium payments can iron out the impact of volatility. The switching option can be leveraged to maximise their returns. For instance, if one is of the view that over the next 12-18 months the interest rates will come off, then one can, over the time frame, systematically switch from debt to equity.

The table depicts the performance of equity markets and the historical returns given for a regular annual investment of Rs. 20,000/- vis-à-vis the historical performance of a taxable fixed income instrument.

Empirical evidence shows that equities as an asset class provide superior returns over the long-term.

Which is the right ULIP for me?

ULIPs can be selected based on one's earnings, expenses, liabilities, long-term financial goals and age. Life insurance companies have tools and calculators which enable individuals to select the right product and premium amount which is best suited to their wallet.

The ULIPs, post the new regulations have become more customer-friendly. The regulator has introduced caps on the Reduction in Yield (RIY) and surrender charges. RIY is the measure of gap between what the customer's funds actually earn and what the customer gets after deduction of charges. The lower the difference, the better are the returns. In some ULIPs the RIY is as low as 1.5% for a policy term of 20 years, this makes life insurance products a cost effective route to achieving financial goals. In case policyholders stop making premium payments, monies of such lapsed policies is transferred to a 'Discontinuance Fund' where it earns an interest rate equivalent to the savings bank account rate. This ensures that the policyholder's funds continue to generate returns.

To sum it up, it can be said that ULIPs are the new-age investment instruments which offer financial protection to the family of the policyholder, a tool to build wealth over the long term and offer tax benefits. The new charge structure of the products and the reduced surrender charges present a very good proposition for the long term investor. All in all it is safe to say that Unit Linked products are ideal for young and middle-aged working Indians so that they can maximise the returns on their hard-earned savings.

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