What is ULIP?

A ULIP was caught the world’s fancy in the 1960s when it originated in Britain. Soon after, they became some of the most popular insurance products in Europe and then the US. India, prior to opening up the insurance sector, had no experience with these products and have only recently been exposed to ULIPs.

“ULIPs provide for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as net asset value (NAV). ULIP is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire: equity, fixed-return or a mixture of both. Investments in ULIP are covered under Section 80C of the Income Tax Act.

In a ULIP, a certain part of the premium is invested in listed equities/debt funds/bonds, and the balance is used to provide for life insurance and fund management expenses. Yields earned on investments ie, the value of the investment or the sum assured, whichever is higher, is paid to the insured or nominee. This varies from company to company ie, some insurance companies pay the value of the investment in addition to the sum assured.

“Traditional insurance products have a fixed contribution and fixed return as well. This was till the people stated the concept of unbundled products. This led to the development of unit-linked insurance plans which sense then moved into many other areas like mixed products. If a person is looking for both cover and savings both then they can choose to go in for a ULIP which offers this option.  A customer knows what he is paying but not what the maturity value is. Customers are also unaware of how the money they have spent is allocated and invested by the company in this case. There is a major lack of transparency on how is the premium being used. In terms of transparency, the life insurance sector decided to move to a ULIP.”

Types of ULIPs

ULIPs offer investorsto invest in a wide variety of products and customise their investments constantly to better meet their needs. There are currently 112 and counting ULIP products available in India. These range from products which have funds that are invested a 100% in equity and yet from there you have the flexibility to shift to a fund that has 100% debt. This is not the case with endowment type plans- individuals can’t choose their investment avenues and have to be content with the insurance company’s investment decisions; which revolve largely around debt ULIPs are available in three broad categories. Aggressive ULIPs which invest up to 100% of their corpus in equities, Balanced ULIPs which invest up to 60% of their corpus in equities and balance in debt market and Conservative ULIPs which invest up to 100% of their corpus in debt instruments and the money market instruments.

Individuals are free to decide where they want to invest their money when it comes to ULIPs. For example, individuals with an appetite for risk can invest their entire money in equities while conservative individuals have the option to park their money in balanced or conservative ULIPs. A certain proportion of the premium paid is invested in market-linked instruments like equities and bonds and the balance is used to provide for the expenses incurred on providing the investor with an insurance cover. These are all as per the mandates of law within which these firms operate.

Advantages

The advantage to the customer in a ULIPproduct is that one can see everything. All the charges which are deducted for various reasons are shown and once can judge fairly accurately how much money can they expect back on the maturity of their investment, based on the NAV returns. There is also a lot of transparency on how is the money being utilized by the company. The nature of the contract itself offers a great deal of transparency and flexibility both to the policy buyer. One can hence choose the type of investment they would like to go in for based on their risk appetite. Customers also have the advantage of shifting from debt to equity in whatever percentage they like at anytime. In insurance one gets both a cover towards insurance and an investment. The percentage of a person’s premium that goes towards insurance is approximately Rs 150 per lakh per annum.”

Investors can select a ULIP with an equity-debt combination that is in line with their risk profile. A risk-taking investor would typically select one with a high equity component, while a risk-averse investor would opt for a debt-heavy one. Investors also have the opportunity to manage their money, therefore when equity markets seem murky, investors can shift their corpus into a debt-oriented portfolio, protecting it from volatility in the equity markets. There are advantages like the top-up facility (which is like a one-time premium payment) that can be used to gainfully utilize surplus monies.

“Our focus right now is on good products and continuing to support the premium in case on the holders dies and a child is left unsupported especially. For high net worth individuals (HNIs) there us a one time payment option product available as well,

Risks and returns

“There is no fixed returns one has in a ULIP as it is entirely dependent on when one enters and exits the investments. Timing is a key factor here and a lot also depends upon what sort of investments the fun partakes in,” feels Prasad. “A ULIP is a very good product for those who are familiar with the markets, who can ride the volatility and who have a risk appetite. If as an holder one is not aware of the markets and one is only looking for an insurance cover, then a ULIP may not be the most convenient plan. Upturns and downturns or slowdowns will not affect a traditional insurance product. A ULIP is also useful in getting middle men or distributors and agents to connect and engage with the client more, as there is constant advice and instructions being passed on to move the investment allocation” concludes Prasad.

“ULIPs give good returns, however, customers are unaware of the expected returns while purchasing the product. However, illustrations show that even in 2008 an IRR of 3.5-7% was gotten. This can even go beyond the 10% mark, however an average of 7-8% is common”

The average returns of most ULIP products is said to be 8% but one can use the effectively to earn a lot more than that. In the short term a ULIP is very cost effective way of investing in the markets, but in the longer run, the expenses one pays in a ULIP is more than that in a mutual fund and one should not substitute one investment for another.

Iin a ULIP policy insurance companies have to manage the fund and premium value both. The exact value that the policy holder will receive on maturity is not known or guaranteed.