Deepak Yohannan
Unit Linked Insurance Plans, also known as ULIPs, have become a popular choice among many investors. Differing from the simple and straight forward, term and endowment plans ULIPs are preferred by many for their ability to combine protection and wealth creation. The insurance market today is flodded with ULIPs of different kinds, carrying different degrees of risk. Plans are tailored to meet different investor profiles. Bearing this in mind, is a Unit Linked Plan a worthwhile option? Is it for you? Here is a quick guide to understand this.
Decoding ULIPULIPs are insurance policies that pool protection and investment together in a single policy. With a single investment, you get a life cover as well as an avenue to invest your money in the capital markets. Because of this, ULIPs are fraught with a certain element of risk, unlike traditional life insurance policies.
In a unit linked plan a portion of the premiums that you pay, goes towards meeting your insurance needs and another towards investment. With the invested amount, units are allocated in a fund of your choice. The funds could be purely equity based, debt or a combination of the two. The value of your investment thus depends on the performance of the underlying fund. It is because of this ULIPs carry a degree of risk in them.Know your riskAs an investor in ULIP the risks you may face are:
>> Market risk: The most primary risk, ULIPs is strongly affected by the ups and downs in the capital market. The volatility in the equity market and an increase or decline in interest rates, could impact the Net Asset Value of the fund.
>> Lack of guaranteed returns- Because the performance of the fund determines the gains or losses, there is no guarantee of returns. This is the risk the investor would have to bear.
>> Liquidity Risk: ULIPs prescribe a lock in period initially of 3 to 4 years. Liquidating in this period may entail you to a loss of investment. Besides, in case when fund performance is low, your gains may be restricted too.
Your fund optionsULIPs offer different fund options to cater to varying degrees of risk appetites. You could choose the one that suits your individual profile.
| Equity Funds | Debt Funds | Money Market Funds | Balanced Funds | |
| Invests in | Stocks and shares | Fixed income such as bonds and government securities | Bank deposits, cash and money market instruments | Combination of equity and debt investments. |
| Risk | High risk | Low to medium risk | Low risk | Medium risk |
| Primary Aim | Capital appreciation | Capital preservation | For short term investors | Capital preservation with moderate levels of capital appreciation |
>> You have a long term horizonULIPs are best suited for individuals with a long term financial plan of wealth creation and insurance. Whether it is for retirement, children’s education or for other financial goals, a ULIP continued till maturity works as an advantage. It gives you the dual benefit of savings and protection, all in a single plan. Also, in the long term, risks associated with market fluctuations are greatly reduced, and the investment could fetch higher yields.
>> You are looking for capital appreciation with a willingness to put up with riskIf you are a moderate to aggressive investor, and look out for growth of your money, ULIPs may be a good option. Of course in good times, you would make a considerable amount on your portfolio, but you also stand to make losses in a downfall. Generally, the younger you are, the greater is your risk taking ability. As you progress in age, family commitments, increase thus reducing your ability to take risk.
>> For convenience For those of you who do not have the time or expertise to invest in the market, with the various funds offered, you get an opportunity to invest across different asset classes of debt, equity or a balance of the two. The funds are monitored by expert fund managers, making it easier, without having you to churn out the portfolio to make gains.
When should you not look at ULIPs?
>> When you are a short term investorULIPs may not be an ideal option for the short term investor. Not only are your gains restricted, it works out expensive on the pocket too. The commissions in the first year for a ULIP are around 18%, 7%in the second year and 4% thereafter. Exiting the policy during this time could yield minimal returns as a large chunk of your investment would go towards meeting these charges.
>> When liquidity is a priorityULIP typically have a lock-in period of 3-5 years during which time units cannot be sold. So if you are looking out for a more liquid option ULIPs are not meant for you.
>> When you want a larger insurance cover at lesser costA large insurance cover in a ULIP works out far expensive than traditional insurance policies such as term or endowment. With the various charges such as fund management charges, distribution and asset management charges, ULIPs work out to be a pricey insurance option.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal.
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