If you have invested in a ULIP plan, it’s important to know that, as an investor or insured, you can closely monitor your investment portfolio. Therefore, you can proactively manage the ULIP policy to maximize your return on investment to the best of your knowledge and expertise. You can always leave the fund switching work to the ULIP’s fund manager, in case you are not comfortable with it. You can also consult a subject matter expert who can help you with the same.
Managing a ULIP policy is not that difficult if you invest a little time and effort. So, let’s begin with the basics.
What is ULIP
A unit linked insurance plan (ULIP) is a life insurance product that allows the insured to generate market-linked returns by taking advantage of different types of funds. Therefore, a ULIP is a life insurance policy and investment plan rolled into one. When a policyholder pays a ULIP premium, a portion of the premium money is utilized to secure life insurance for the insured while the rest of the money is invested in a fund of choice (equity or debt funds) after deducting applicable charges.
In case the policyholder dies, the death benefit is paid to the nominee, as per the ULIP policy terms and conditions.
Why ULIP?
1. Ideal for goal-based savings and investment
ULIP is a long term investment product and flexible enough to be customized to meet life goals (such as buying a home, sending children abroad for higher education or living a comfortable retirement life) of the policyholder. Through systematic and long-term disciplined investment, ULIP encourages goal-based savings and investment.
2. Flexibility
A ULIP policy gives you tremendous flexibility and transparency when it comes to managing your investment.
3. Switching funds
Switching funds to maximize returns and protect your investment is easy with ULIPs. Some insurance companies allow you to make as many as 12 free fund switches in a year to diversify your investments according to market environment and investment goals. If you know what you are doing, you can protect your investment and maximize your returns with fund switching.
The primary objective of switching funds is to leverage on the performance of funds. If some of your funds don’t yield returns as expected, you can allocate more of your money to funds that are doing well. However, you should be balanced in your approach and not get carried away in the pursuit of high returns. To ensure that fund switching works in your favor, you should track your fund’s performance at regular interval, which is reflected in the ULIP’s daily net asset value (ULIP NAV) declared by your insurer.
The Net Asset Value or NAV of a fund is the prevailing price per unit of a fund on a particular day since NAVs are published daily. NAV of a ULIP fund is dependent on the performance of the debt and equity markets. ULIP returns or fund value is calculated on the basis of NAV of the ULIP fund. According to IRDAI, it’s mandatory for fund houses to declare the net asset value (NAV) of a fund on a daily basis.
NAV of a ULIP plan is calculated by deducting total debt of the fund from total assets and dividing it by the number of outstanding units.
The formula is: Net Asset Value (NAV) = (Assets – Liabilities) / (Number of Outstanding units)
Example:
Assume that the total value of assets for a XYZ fund is 100 Crores and is divided into 5 crore units/ shares so that retail investors can invest in the fund. There are various operational costs of XYZ fund such as administration charges, fund allocation charges, management fees, insurance claims etc. These are the liabilities of the fund. Assume this liability or costs amount to Rs. 20 crores. In this case, NAV of the ULIP fund will be calculated as follows.
NAV of XYZ ULIP plan = (Rs. 100 – 20 Crores) / Rs. 5 Crores = Rs. 80 crore/ 5 crores = Rs. 16
In this case the NAV of XYZ ULIP fund on that particular date is Rs. 16.
4. Good place to start for new investors
ULIP with its transparent structure, life insurance protection, flexibility and direct exposure to market-linked products can help in generating optimum returns Also, ULIP is a good place to start for new investors as it gives you ample time, opportunity and flexibility to experiment with your fund allocation.
5. Tax benefits
Premiums paid on a ULIP are eligible for tax deductions under Section 80C provided the premium amount is less than 10% of the sum assured, with the maximum amount allowed being at Rs. 1.5 lakhs; and the proceeds of the policy, whether its death benefit or maturity value is exempt from taxes subject to satisfaction or conditions mentioned under Section 10(10D) of the Income Tax Act, 1961.
The above mentioned deductions and exemptions are subject to the provisions mentioned in the Income Tax Act 1961.
How to manage your ULIP policy?
There are three ways you can manage your ULIP policy:
1. Free self-switching of funds to maximize returns and protect your wealth subject to policy terms and conditions.
2. Rely on automatic switching i.e. let the insurance company manage your funds
3. Using top-ups to increase your investment when the market is doing well
It is always a good option to take a subject matter expert advice before taking any decisions in order to keep your Life Goals on track
Free self-switching of funds
Free self-switching of funds is a unique feature of ULIPs that puts the investor in the driver’s seat when it comes to maximizing returns and protecting his investment. You can use self-switching to decide how your portfolio performs based on your investment goals, tenure and risk appetite.
When we speak about switching funds, it simply means changing the way your money (premium) is being allocated to different ULIP funds such as debt or equity funds. The purpose of fund switching is to mitigate the risk from market fluctuations and at the same time optimize returns by balancing between debt and equity funds.
When to switch funds in ULIPs
When the stock market is bearish, fluctuating or when the stock prices are falling down, this is the best time to make a fund switch. At this time, you need to reduce your exposure to equity funds and allocate your funds to debt funds which are less volatile. And as you can see the stock market doing well, you can again allocate more to equity funds to maximize returns.
Similarly, if you have been investing for a child’s marriage or higher education, you should allocate more of your funds to debt funds as you draw closer to this milestone. In this way, you can protect your wealth in case any volatility occurs in the equity market to adversely impact your corpus.
Fund switching and allocation can also be realigned as you advance in age. Assume that you started your ULIP policy when you were a 30-year-old and you wanted aggressive returns. So, you allocated all your money to equity funds. You should reduce your exposure gradually with each milestone or development in your life.
Below could be an example of how you could look at managing your ULIP portfolio. However, it is always better to consult a subject matter expert and then make a sound decision according to your risk appetite and Life Goals planned.
For instance, once your child is born you can reduce your existing equity exposure by 20% and a further 20% once you reach the age of 40 years. Then, you should consider reducing your equity exposure every 5 years until your equity exposure is only 20% in your total investment portfolio as you approach retirement or towards the policy maturity date. In this way, you will be able to efficiently manage your ULIP portfolio based on market conditions, life stages and important milestones in your life.
Automatic switching
Automatic switching is a good option for investors who don’t have the time or are not comfortable handling their investment portfolio. Such investors can go for automatic switching provided by the insurer. In this portfolio strategy, your investment is managed by professional fund managers based on a pre-defined parameters selected by you.
Below are few investment portfolio strategies that you can pick while investing in a ULIP plan as per your needs. The strategies available under ULIP plans differ, hence you need to check what options are available within the plan selected and decide accordingly. These are a few strategies that you could get within the ULIP plans that you select to achieve your Life Goals.
• Wheel of Life portfolio strategy: In this strategy, the premium is allocated among 5 different funds at a predefined ratio. The philosophy behind this strategy is that financial needs change as the investor’s life progresses. Therefore, the ratio in which funds are allocated is realigned as the policy approaches maturity.
• Trigger-based portfolio strategy: The policyholder can only select this strategy at the beginning of the ULIP plan. In this strategy, premiums get allocated at a ratio of 75:25 in Equity Growth Fund II and Bond Fund based on predefined trigger events. Usually, the trigger event is related to the upward movement in the ULIP NAV or unit price. This automatic switching strategy helps secure better returns and maintains asset allocation.
• Investor selectable portfolio strategy: Policyholders can allocate premiums based on their personal choice among the funds that suit their investment needs.
• Auto transfer portfolio strategy: In this Bajaj Allianz ULIP portfolio strategy, you can automatically see your money getting invested in a systematic manner over the years. This option shifts a proportion of your fund from low-risk funds to a fund of your choice based on the number of outstanding months till the next premium. This portfolio strategy is not available for those using the monthly premium payment mode. These strategies vary from product to product. Hence you need to be well informed about the strategies mentioned within while selecting a ULIP Plan.
How to switch
Most insurance companies provide self-switching facilities to policyholders on their customer portal. All you have to do is to login with your username and password and enter the percentage of ULIP funds to switch from the old to the new. Once you confirm, the defined percentage of funds is switched to the new funds. While switching funds is a very useful and valuable option for ULIP policyholders, you should use it wisely and with discretion. If you are not sure of what you are doing, you could also go for automatic switching option or if you are looking at an expert advice face to face, you can get in touch with the insurance provider customer care and seek guidance and handle your fund switches accordingly.
However, there are a few ULIP plans that come with unlimited free fund switching option subject to conditions mentioned under the product.
ULIP charges
ULIPs have been wrongly attributed to be high cost products whereas ULIP charges are very reasonable and transparent. Fund management charges in a ULIP cannot go higher than 1.35%. Mortality charges in ULIP have also been a bone of contention among investors and insurers since they used to be a bit on the higher side earlier.
However, today they are significantly lower and some ULIP plans, provide return of mortality charges. Apart from low ULIP charges, there are a few ULIP plans that come with zero allocation and policy administration charges.
Having a broader understanding of how the financial markets work will help you immensely in the decision making process while you manage your ULIP policy. As ULIPs allow policyholders to constantly monitor and review the progress of their portfolio, you must take maximum advantage of this option. Regular review and monitoring of your portfolio help you to optimize your asset allocation and maximize returns.
You should keep yourself updated with the latest market and economic news and at least have some basic knowledge of how the financial markets work. This not only helps you take the right investment decisions but also understand the decisions taken by your wealth manager, financial planner or insurer on your behalf.
If understanding the financial markets and taking investment decisions on your own is difficult, you can always take assistance of experts. Whether its fund switching, increasing the sum assured amount or using top-ups to enhance your corpus, insurance experts or financial advisors can help you manage your ULIP policy better. If you are sure that you can manage your ULIP policy on your own, you must have a well-planned strategy in place to achieve your financial goals. Finally, ensure that you are investing for the long-term and are disciplined in your investments to build a sizable corpus and achieve your life goals.
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