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    ULIP Plans In India – A Step-By-Step Buyer’s Guide

    ULIP plans in India

    ULIP Plans In India – A Step-By-Step Buyer’s Guide


    calender-blue

    April 23, 2020

    By : Bajaj Allianz Life

    The financial sector in India has evolved over time. The number of insurers, banks, asset management companies and brokerage firms have grown over the years giving customers a wide variety of choices. But multiple options often cause confusion. It is always easier to decide when you have limited choices. The confusion arises at two levels—the type of product and the service provider. For instance, if you want to buy a life insurance plan, you will have to choose between various insurance plans such as a unit-linked insurance plan, term insurance plan, money back plan or a whole life plan.

    After an objective analysis, you may decide to invest in a unit-linked insurance plan. Now, you will have to choose one from the hundreds of plans provided by scores of insurers. It is significantly easier to decide if you have a clear idea of your requirements and the metrics to analyse a product. ULIPs provide investment benefits along with insurance, but many people get confused with ULIPs. Let us take a look at different aspects of ULIPs, it will answer important questions such as ‘what is ULIP plan?’ and ‘why should I invest in ULIP?’

     

    What is ULIP plan?

     

    A unit-linked insurance plan is a combination of insurance and investment. ULIPs provide protection along with wealth creation. When you invest in a ULIP, a portion of the premium is used to provide the insurance cover, while the balance amount is invested in market-linked instruments. A professional fund manager handles the investment corpus and investors are provided various fund options to choose, ranging from debt and equity funds. You can choose a fund option depending on your long-term financial goal. If you are investing for your retirement, you may opt for a debt fund as they are relatively safer. If the target is wealth creation over the long run, you may choose an equity fund that provides investment growth. You can switch your investments between different funds based on your risk appetite and market conditions during the tenure of the policy.

     

    Why should you invest in a ULIP?

     

    The basics of ULIPs are clear, but every investment has to have a reason. Either you need a protective cover or you want to save for your child’s education or for your retirement. Before investing everyone should ask themselves an important question, “Why should I invest in ULIP?” ULIPs provide a variety of advantages.

    • Flexibility: One of the biggest advantages of ULIPs is the flexibility of the product. The flexibility helps insurers to mould ULIPs into child plans, retirement plans or wealth creation plans. Depending on the financial goal, you can invest in an equity fund or a debt fund. ULIPs allow you to switch between funds and adjust your portfolio according to the market conditions and your return expectations. Unit-linked plans allow partial withdrawal after the lock-in period of 5 years, thereby helping you take care of urgent liquidity needs.

    • Long-term benefits: ULIPs have a lock-in period of five years, ensuring that you remain invested for the long term. Though investing just for five years would not be enough to achieve long-term financial goals, the initial lock-in period inculcates a habit of patience and regular savings. With the corpus being invested in equity or debt, it gives substantial benefits over the long term.

    • Insurance cover: With the focus on the investment portion, you should not forget that ULIP is after all a life insurance plan. ULIPs provide life insurance cover along with long-term investment benefits. Just like other insurance products, you can decide the amount of insurance cover you need and pay the premiums accordingly.

    • Tax benefits: Though tax incentives should not be the primary aim to invest, ULIPs provide a host of tax benefits. The premiums paid for a ULIP policy are eligible for tax deduction of up to Rs. 1.5 lakh in a year under Section 80C of the Income Tax Act, 1961. Along with the contribution, the maturity benefits are tax exempt under Section 10(10D) of the income tax law. The aforementioned exemptions and deductions are subject to provisions of income tax laws, as amended from time to time.

    Investing in ULIPs provides a host of benefits, but the primacy should be given to the investor’s requirements. For instance, if you have a short investment horizon of 5-8 years or lower, you may not be able to get the entire benefit of a ULIP plan. Before investing, try to list your requirements and limitations like the investment horizon, financial goal and risk appetite. Once you have a clear idea of your requirements and limitations, analyse ULIP plans on a set of parameters.

     

    How to analyse ULIPs?

     

    An ULIP should be analysed on a number of fronts like performance, price and the credibility of the insurer.

     

    Credibility

     

    Credibility is a major factor in every financial matter. People ensure the credibility of a friend before lending him/her money. When you invest in a ULIP for critical life goals like children’s education or retirement, you have to be doubly sure about the credibility of the insurer. One just cannot afford to lose his/her entire savings due to the financial weakness of the insurance company. The solvency ratio of the insurance company can tell a lot about its financial stability. The insurance regulator has mandated an insolvency ratio of 150%, some companies have a solvency ratio significantly higher than that. The ratio is an indicator of the insurer’s ability to meet its liabilities in extreme situations. A higher solvency ratio is equal to a thicker financial buffer. Along with the solvency ratio, investors should also focus on the claim settlement ratio. It is the percentage of successful claims settled by an insurer. A low claim settlement ratio means that a large amount of claims is not being honoured by the insurance company and vice-versa. The denial of insurance benefits to your loved ones in your absence will defeat the purpose of a life insurance policy, which makes the credibility of the insurer a crucial parameter for investment.

     

    ULIP Charges

     

    When you invest in a ULIP, take into consideration the cost of the policy before investing. ULIP Charges can make a considerable difference in the final returns of the policy. There are several charges levied by the insurance company like fund management charges, premium allocation charges and policy administration charges.

    • Premium allocation charges: The insurer levies an upfront charge for the various expenses related to the sale of the policy like marketing expenses, commission of the agent and underwriting expenses. It is charged as a percentage of the premium and deducted before investing the money.

    • Policy administration charges: It is a flat charge levied for the administration and management of the policy. The policy administration charge is deducted through cancellation of units at prevailing unit price.

    • Mortality charge: Though ULIPs are largely considered to be an investment product, they have an insurance component. The mortality charge is levied to fund the underlying insurance cover. It depends on the age, occupation and health conditions of the policyholder. The mortality charge is deducted at each monthly anniversary by cancellation of units.

    • Fund management charges: The savings component is invested in market-linked funds. The fund management charge is used to pay the fund manager for his/her services, just like a mutual fund. The fund management charges are generally higher for equity-oriented ULIPs and lower for debt-oriented ULIPs. The insurance regulator has capped the fund management charges at 1.35% per annum of the total fund value.

    Insurance companies levy certain charges for switching between funds and for facilities like partial withdrawal. The various ULIP charges together can have a significant impact on the overall returns of a policy. It is important to evaluate the different charges levied before opting for a ULIP. Moreover, since most of the expenses are front-loaded in a ULIP, you have to remain invested for a long term to get optimum results.

     

    Fund Manager

     

    Several factors have a bearing on a ULIP and one of them is the people managing the policy. ULIPs are long-term products. People invest in ULIPs to achieve financial goals like retirement and children’s education. Life goals can be achieved in the long run only if the policy delivers expected returns. Stable returns have two aspects—capital appreciation in market up-cycles and risk management in down-cycles. If a fund manager delivers stellar returns over two years, but is unable to limit the losses in a particularly bad year, the returns over three years may not be desirable. One can use risk protection metrics like maximum drawdown and downside capture to judge the risk management abilities of the fund manager.

     

    Performance

     

    The fund manager is a cog in the performance wheel of a ULIP. Internal processes of the insurer too play an important part in the overall performance. For instance, if the fund house is focused on short-term gains, it may take unnecessary risks, which could jeopardise your investments. ULIPs are long-term products and thus, the investment philosophy should have a long-term orientation. Look at the long term performance of different ULIPs to arrive at a conclusion. The performance of funds over 5-10 years are listed on the website of insurance companies, which can be an excellent metric to take into consideration before investing. Don’t forget to take into account both the good and the bad years of the market to make an objective analysis. An in-depth analysis on the above parameters will make the decision process easier. After finalising a unit-linked plan, the next step is to invest in one.

     

    How do you invest in a ULIP?

     

    With increasing digitisation, most insurance companies have started offering online ULIPs. Buying a ULIP online is a short and simple process. To buy a plan online, visit the official website of the insurance company.

    Insurance companies generally have the various ULIP options listed on the website. You can opt one depending on your life goal. It could be for retirement planning, children’s education or for wealth accumulation.

    Before opting for an option, you can fill in your details and calculate probable ULIP returns. You have to provide the premium amount, age, gender, mobile number and the premium payment frequency. The ULIP return calculator will give you an idea of the returns based on historical performance of the funds.

    If you are satisfied with the potential returns, you can proceed further. In the next step, you will be prompted to provide your name, date and birth and mobile number. Some insurers may also ask for the email-id. Once you fill in the details, an executive will call you and guide you through the process.

    Buyers are required to fill an application form and submit it with required documents. After the submission, pay the first premium and the process of purchasing is completed.

    If you are not comfortable with buying ULIP online, you can visit the nearest office of the insurance company or get in touch with an insurance agent. The offline and the online processes are similar. You have to provide the required documents and submit an application form with the applicable premium. The agent assists you throughout the entire process while buying a ULIP offline.

    It is, however, advisable to buy ULIP online as it is cheaper than an offline plan. Online ULIPs have lower costs due to the elimination of intermediaries like insurance agents. The process is also transparent and hassle-free when compared to the offline experience.

     

    Conclusion

     

    ULIPs are not as complicated products as they are made out to be. ULIPs are one of the preferred investment plans to achieve long-term financial goals. One also gets an additional layer of protection through the insurance cover. With an explicit financial goal and the understanding to analyse ULIPs, you should invest in a suitable unit-linked insurance plan.

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