Fill it, shut it, forget it. That’s how most people treat insurance. They take a policy, pay premiums, claim their tax breaks and that’s it. Which, as we’ve said often enough, is not going to help anyone but the insurance company. Insurance is not about tax breaks or returns; it’s about protecting your financial dependants. If, in the process, you can save on tax and make a profit, it’s good, but that is not its main purpose. This is what a traditional insurance does. If you want it all, go for Ulips. They offer you the best of all worlds—insurance cover as well as investment returns and tax savings.
So you might rightly ask, where’s the catch? The catch is that you cannot afford to take the ‘fill it, forget it’ approach to Ulips. Since these products are market-linked, it’s essential that you keep tabs on the bourses even if you don’t understand completely what’s going on. Getting the big picture right can help because you’ll know when something’s going wrong and can exit, if needed, or switch to a more promising option. But to understand it, you first need to get your Ulip basics right. To help you do this, here is an introduction to Ulips.
Smita Choudhary, 48
Insurance cover: Over Rs 10 lakh“Ulips offer investment returns without compromising on my life cover. It gives me peace of mind.”
Ghaziabad-based Choudhary considered insurance a taxsaving tool and had only some endowment policies from LIC. But after an agent calculated that she was insured for only 10% of the economic value of her life, she began finding out about other insurance plans. Today, she has a mix of Ulips and traditional plans, and feels she is adequately covered. |
“Ulips combine investments and life insurance in a single product,” says Bert Paterson, managing director, Aviva India Life Insurance Company. This is where they differ from traditional life insurance products (see table). Traditional plans have never offered policyholders the kind of choice and flexibility of investments that Ulips give. Unlike Ulips, which allow you to choose a fund option depending on your risk appetite and return expectation, traditional insurance plans invest mostly in debt instruments. So even if the policyholder has a higher risk appetite, he will be saddled with a low-risk investment that earns very low returns. “This makes Ulips a convenient and flexible product for those looking to control their insurance plans,” adds Paterson.
With Ulips, you can choose the extent of life cover and investment you want. So, while offering protection, these plans work as effective wealth creation tools. Even better, they come with built-in tax saving features. Gaurav Sinha, a Delhibased software engineer, says, “I bought traditional life insurance products just to save tax. However, three years ago, when I got married, I took stock and found that my insurance cover was woefully inadequate.” Luckily, Sinha had a financial planner who showed him how much insurance cover a 30-year-old needs and by how much he fell short. “I paid Rs 57,000 a year for four endowment and money-back policies, which added up to a cover of Rs 5 lakh, much below what my life was worth,” says Sinha. His planner showed him how the traditional high-cost, low-value insurance plans functioned more as savings instruments than protection. Sinha agreed to his suggestion to buy a Ulip for more life cover.
Like many others, Sinha has realised that Ulips can do several things effectively. Apart from providing adequate and appropriate life insurance, Ulips allow you to modify your cover with changing circumstances and external factors. “You can buy Ulips not just to protect your dependants, but as an effective wealth creation tool, with efficient tax-saving features thrown in,” says Deepak Satwalekar, managing director, HDFC Standard Life Insurance. It is this feature that has seen the average annual premium paid per person rise from Rs 6,700 in 2002 to Rs 16,400 in 2007.
Riders and Top-ups
You can add riders to a Ulip and expand the scope of cover. Riders cover accidental death, medical expenses and critical illnesses. Top up your premium at zero cost. The top-up amount should not exceed 25% of regular premiums paid till that time. If annual premium is Rs 10,000, the top-up after four premiums cannot exceed Rs 10,000. |
Structurally too, Ulips differ from traditional insurance. For instance, instead of fixing the extent of cover, it looks at the annual premium that one can pay and works on the minimum sum assured based on this value. A part of the premium is invested in an underlying fund, while the rest serves as the insurance premium. In the process, Ulips offer investors what no traditional policy does: information about how the policy is working.
Naturally, Ulips have gained hugely in popularity ever since they were introduced in the country. The fact that they invest in equities is one of the major attractions, as investors know they can benefit from any bull run while not taking away from their family’s protection. There are three important features that set apart Ulips from traditional insurance products.
Life cover: Today, Ulips offer a choice between basic death benefit, death benefit plus fund value, or the higher of the death benefit and fund value. There are also riders that can be attached to enhance the scope of life cover you take. “One can also increase the sum assured, which is required as one ages, with changing situations and with the inclusion of dependants,” says Brijesh Dalmia, Kolkata-based financial planner. Investment: Ulips are powerful, long-term wealth creation tools since they invest a specified amount in market-linked instruments. These plans invest in a mix of debt and equity, which gives you a good asset mix in a single product. “The main advantage for Ulip-holders is the flexibility to choose and decide on an asset allocation that is the most appropriate to their risk tolerance,” says Satwalekar.
Premium: Even though you commit an annual premium for the tenure of the policy, you can make additional premiums during the years that you have surplus money (subject to limits) while retaining the same cover, or by proportionately increasing the cover. This is a cost-effective way to make good use of any windfall. Better still, in the years that you can’t pay the premium, the unit values are redeemed to pay for your life cover, while retaining the basic life cover.
| “Ulips don’t just protect your dependants, they also help create wealth, with tax saving thrown in.” — Deepak Satwalekar, Managing Director, HDFC Standard Life “People usually think the market will go up when they buy a Ulip. They must see the other side of the coin too.”
— Brijesh Dalmia, Certified financial planner |
All of which is good, but why do you have to be tuned in to your plan? Can’t you just pay your premiums on time and let the Ulip do its job? No, because the return from Ulips is directly linked to the stocks and bonds that the plan invests in. If you follow the equity markets, you’ll know that you can make a killing in the bull runs and be killed in the bear phases.
Most of us tend to forget this when we don’t invest in the market directly. “Often, people consider the scenario of the market going up while buying Ulips. It is important to look at the other side of the coin too,” says Dalmia. So, if the market goes down, be prepared for the fund value to decline, reducing the return on your investment. This is probably one aspect that makes it important to know your risk appetite before buying Ulips. It’s also the reason why you should monitor your investments and the market regularly. After all, Ulips give you a far greater control over your investments than any other insurance product. So you can move out of equities during a bear phase and return when the markets turn bullish—without affecting your life insurance cover.
| Ulips vs traditional insurance |
| Features | Traditional plans | Ulips |
| Investment mix | High exposure to bonds and no choice to hike equity exposure | Policyholder can choose exposure to debt, equity |
| Transparency in cost | No | Yes |
| Alter scope of cover | No change possible in sum assured and premium | Freedom to enhance life cover, top up premiums |
| Charges | Variable charges through the term of the policy | Flat charges throughout the term |
| Vary exposure to risk | No option for policyholder to alter exposure to risk | Possible to switch between fund options |
| Premium holiday | No | Allowed |
| Liquidity | Policyholder can take a loan against the policy | Partial withdrawals allowed after three years |
| Policy value | Complex calculation to arrive at paid-up value after 3 years | Surrender value indicated at the end of each policy year |
