If you have had walked into the banks between 2000 and 2008, a corporate agent, at some point, must have pitched you an Unit Linked Insurance Plan (ULIP). In lure of earning huge commissions, they would often provide half-baked information to investors and two of the common tricks they would often use - ULIPs give more returns than the bank fixed deposits and it would double your money in three years. Investors, unaware of the high front loading that came with ULIPs during its initial years, lost more than half their money when the market crashed in 2008. Enough damage was already done when in September 2010 the Insurance Regulatory Development Authority (IRDA) acted upon what was happening and introduced a slew of new norms governing the way the ULIPs were operating.
Today, however, ULIPs has come a long way from its reputation of being a mis-sold product. With new guidelines such as increasing disclosures, minimum lock-in period increased to five years and commissions capped, the new-age ULIPs have become a much better financial product. Puneet Nanda, Deputy Managing Director, ICICI Prudential Life Insurance, said, “This category of savings products has grown in individual new business premium by 27 per cent year-on-year from Rs14,155 crore in March 2017 to Rs17,942 crore in March 2018.” Today, they are one of the best goal-based savings products that help customers to achieve their long-term financial goals. They also help achieve a disciplined approach towards saving and building a corpus over the long-term. But can it be considered as a smart investment option?
ULIP is a cocktail of insurance and investment. They offer the dual benefit of wealth creation through a variety of investments along with life cover to fulfil the multiple financial goals over the long-term. In case of unfortunate death of the insured person, his or her family will receive life insurance cover or prevailing fund value, whichever is higher. However, Karthik Raman, Chief Marketing Officer and Head, Products And Strategy, IDBI Federal Life Insurance, explained, “As these have the option of systematic monthly payments, the investments are not heavy on the pocket, and the family receives the benefit of rupee-cost averaging along with tax benefits. With a lock-in period of five years, the fund managers have the flexibility to choose better scrips over the long-term.”
That said, ULIPs also provide customers with the flexibility to choose their asset allocation between equity and debt, depending on their risk appetite. In fact, a customer has an option to choose their investment in 100 per cent equity or debt. Further, many insurance companies do not levy charges for switching between the funds. After five years, the customer can choose to withdraw their investments partially or fully.
Today, there are two types of ULIPs available. First, in case of death of the policyholder, the life insurance company will pay the sum assured or accumulated fund value whichever is higher to the dependents. Second, the dependent will receive both - the sum assured and also the accumulated fund value. When it comes to charges like the post cap on charge and reduction on yield guidelines, they have gone down drastically. The existing charges under this product category are minimum giving significant liquidity to the customers. Sunil Sharma, Appointed Actuary and Chief Risk Officer, Kotak Mahindra Life Insurance, said, “While all charges have maximum limits capped by the regulator and also because an overall cap (reduction in yield) has been defined, it is still prudent to compare the available options and then make a decision. Key important charges to check are - premium allocation charge, policy administration charge and fund management charge.” (See the Table: Options and Charges of ULIPs with various life insurance companies)
ULIPs enable individuals to build a corpus in a tax efficient manner. For ULIPs, the premiums paid are exempt from tax under Section 80C. Further from Financial Year 2018-2019, deductions can be claimed up to `1,50,000 for the total payments, contributions made under Section 80C. The benefits received under the plan are exempted from Income Tax under Section 10(10D) of the Income Tax Act, 1961. In addition to that, both these benefits are subject to the life cover being a minimum of 10 times the annual premium amount. Also the switch option available to change asset allocation from equity to debt or vice versa is free of any tax implications. Tarun Chugh, MD and CEO, Bajaj Allianz Life, said, “ULIPs provide customers a great option to invest in the Indian stock market to achieve their long-term financial goals. Further the product category also got an added boost with the long-term capital gain tax announcement in the Union Budget 2018-2019.”
When talking about the long-term benefits, with the ULIPs, the power of compounding wins. The longer you stay invested, better is the compounding returns. Also, some industry experts agree, investing in ULIPs for a longer period is even better than investing in mutual funds. Anup Seth, Chief Retail Officer, Edelweiss Tokio Life Insurance, said, “Mutual fund entry costs are much lower than that of ULIPs. However when compared to the cost of mortality of ULIPs over the next three to five years, it is much cheaper. And for this reason, their performances are equal or better than mutual funds in the long-term.”
When it comes to investing in mutual funds, there are no tax benefits available apart from ELSS. Sanjeev Pujari, President, Acturial and Risk Management, SBI Life, stated,“There are various options in ULIPs like fund switching, premium redirection, partial withdrawal, increase or decrease of policy term and premium payment term, tax benefits, which makes them more flexible than mutual funds.”
According to IRDAI annual report 2017-2018, ULIPs registered a growth of 22.72 per cent premium from Rs52845.26 crore in 2016-2017 to Rs64850.90 crore in 2017-2018. Accordingly, the share of unit-linked products in total premium increased to 14.13 per cent in 2017-2018 as against 12.63 per cent in 2016-2017. This shows a significant increase in the demand for ULIPs over the last few years. However, this product category may not be suitable for all class of customers. Sharma said, “As the investment risk in this product category is borne by the customers, unlike in traditional product where the investment risk is borne by the insurer. ULIP is suitable for financially sophisticated customers with relatively higher risk appetite.”
Today there are various ULIP plans catering across different life stages of an individual. Life stages that can be classified as young and single, married without children, married with children, parents with grown-up children and close to retirement. It is up to the investors to quantify their financial goals based on the time frame in which they wish to achieve them. Customers should bear in mind that ULIPs should be purchased with at least a five-year agenda and throughout this period they need to pay premiums.
First, the key is to define the need for which you would like to buy an ULIP. Post that, choosing the right one becomes an easy job. (See the Table: Steps to choose a right Ulips)
Nanda explained, “A single individual in the 30s can have a higher allocation towards equity as the risk-bearing capacity is higher. While an individual nearing retirement should ideally have higher allocation towards debt. The flexibility offered by unit-linked products is unmatched with any other financial savings products available.”
However with the careful planning over the years, the wealth created from the ULIPs can be used for child’s higher education or other requirements like retirement planning. “Additionally, child-ULIPs offer a waiver of premium benefit in case of the unfortunate demise or disability of the policyholder, while there are certain ULIPs that also offer critical illness benefits and health riders.” said Raman.
Today customisation of ULIPs has helped many policyholders to select according to their requirement based on the amount of premium and how long they want to continue the policy. Insurers introduced features such as return of mortality charges (RoMC) in its ULIPs to ensure policyholders get the most value. With this feature, a policyholder gets all the money paid towards the life cover back in case the policyholders survive the policy term. With features like RoMC, ULIPs are strengthening their position as a go-to investment tool.
As per insurance experts, ULIPs are absolutely transparent and all charges are defined upfront. “From a transparency perspective, today, the new-age ULIPs are the most transparent product available. Customers are provided with all details before the purchase. Further, companies provide all customers a 15-day free look period to help them change or return the product they invested in if it isn’t as per what they were looking for,” highlighted Chugh. (See the Table: Returns of Ulips)
While investing in ULIPs, investors should look to stay invested over the period of eight-10 years. This will generate reasonable returns for them and help them achieve their goals, along with managing inflation. Sharma pointed out, “On the liquidity front, the unit-linked products provide complete liquidity from the fifth policy year onwards. This allows the funds to grow and provide a decent level of return to the policyholder.”
Being one of the strongest products, providing a triple advantage of investments, life insurance cover and tax benefits, ULIPs are surely becoming one of the most preferred investment tools.