An oft-repeated question is: “Should customers buy a unitlinked insurance plan (Ulip) that combines the benefits of insurance and investment or are they better off buying term insurance and separately investing money regularly in other dedicated savings instruments? Since Ulips emanate from the stables of a life insurance company, financial protection is an inherent benefit. What makes it more attractive is the range of additional benefits Ulips combine potential for good returns, flexibility, transparency and tax efficiency.
Over medium- and long-term tenures (a 6-7 year period), Ulips have the potential to provide good returns. But not all Ulips offer investment guarantees. The cost-return comparison between Ulips and other market-linked saving instruments and separate life protection indicates a better performance for Ulips. Since private life insurance companies are joint ventures of large global insurers, they reflect the international fund management expertise of the foreign partner and the market knowledge and capability of the Indian partner. They also often belong to the same holding company as the top performing mutual funds. Some Ulips also offer special loyalty additions over multiple years towards the maturity of the policy. This ensures that the fund value grows at a pace faster than the returns generated. Though most Ulips have higher front-end charges when compared to other instruments, the relatively lower charges later on during the policy term more than compensates for this.
Ulips also provide flexibility to decrease or increase protection over the term of the plan. One can also add health insurance cover by adding critical illness riders. A customer can enhance, reduce or drop additional covers during the term of the plan.
Flexibility in premium payment is another unique benefit. Most Ulips provide options to increase or reduce premiums after three years. The low or nil surrender charges allow withdrawal of fund value in emergencies. Ulips also provide an option to “enhance” the kitty using top-ups. Maturity proceeds from Ulips are generally tax free, while those from debt-oriented funds are liable to long-term capital gains tax net.
( By K.S. Gopalakrishnan, CFO, Bharti AXA Life Insurance)
