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Make the most of Ulips

Make the most of Ulips

Conventional wisdom is out. A penny saved is no longer a penny earned. In fact, thanks to inflation, that penny could be worth less in a few years than what it was when you saved it.

Conventional wisdom is out. A penny saved is no longer a penny earned. In fact, thanks to inflation, that penny could be worth less in a few years than what it was when you saved it.

This could have disastrous consequences if you’re saving a pile of pennies for your retirement—what you think will be a healthy nest-egg could end up being tiny.

You simply cannot afford to ignore the corrosive effect that rising prices can have on the value of your assets. But how can you make sure your investments grow at a pace that can keep abreast of inflation?

Stocks and mutual funds are good options, but if investing in these instruments makes you nervous, you will do well to consider the more innocuous, but extremely promising, unit-linked insurance plans or Ulips.

Ever since their introduction in the country, Ulips have been popular as instruments that suit almost all risk appetites and needs. And they do not come with all the frenzy and hype that equities bring.

Manoj Agarwal, assistant vice-presidenthead insurance advisory, SKP Securities, says: “Considering that universally the risk appetite of individuals is low, Ulips are ideal entry points into the stock markets.”

Systematic investment: Why have Ulips so captured the public imagination? Go back a few years, and you will see that liquidity, transparency and flexibility were almost unheard of when it came to insurance. But in the past five years, insurance companies have come up with a product that addresses the combined need of life protection and investment.

THREE THINGS TO KNOW WHEN BUYING ULIPS

Charges: Understand all the charges levied on the product over its tenure. A complete charge structure would include the initial charges, fixed administrative charges, fund management charges and mortality charges
Fund options and management: Understand the various fund options available; most Ulips offer at least three fund options—equity, debt and balanced. Opt for one that suits your risk profile
Features: Look for features like top-up or switch between funds, increase or decrease the protection level and premium holidays. Understand the charges associated with all these features

Says Puneet Nanda, executive vice-president and chief investment officer, ICICI Prudential Life insurance: “Ulips offer the choice to enter the stock markets indirectly and for long tenures in a disciplined way; they act like SIPs.”

Mutual funds are popular shortterm products that investors exit when they make enough gains. Ulips work on a similar principle, but are basically long-term investments where an investor systematically invests with a certain lock-in period.

 Investors can choose to invest on a monthly, quarterly, bi-annual or annual basis. “For an investment of less than five years, mutual funds are better,” says Nanda. Ulips are good for a time horizon of more than five years.

The expenses involved in investing in Ulips and mutual funds are usually evened out in the long term. The advantage of Ulips is that there’s no bad time to invest in equities, as these are long-term investments.

Better returns: Some investors and planners claim that you would be better off investing in a mutual fund and taking a separate life insurance policy. However, on costs alone, this is a flawed theory. If one assumes the same rate of return on both the products, Ulips work out to be more profitable.

That’s because while mutual funds are both front and back-end loaded, Ulips are only front-end loaded. “Even though the front-end loads are high in the initial years, it tapers in the long term, making them work better,” adds Agarwal.

USE TOP-UPS IN ULIP

Top-ups in Ulips are additional premiums paid in the existing policy as and when the policyholder desires. In a long-term investment option, a Ulip top-up has several advantages over a mutual fund.
Ulip top-ups cost 1% while mutual funds usually charge 2.25%
A top-up can be in any fund of the Ulip, while in a mutual fund the top-up must be in the existing fund, or the investor must buy a new fund
Ulip top-ups give you tax benefits, while you get tax breaks in mutual funds only if you have opted for an ELSS
In a regular premium Ulip, charges are deducted from the first year premium. If the fund grows at 10% a year, every year, it would take two-three years to recover the premium amount

The other advantage Ulips have over mutual funds is that the former are far more flexible. In a mutual fund, if you decide to move out of an equity scheme to debt, you are charged loads twice—at exit and entry. Such a charge is currently not applicable to Ulips, making them cost-efficient for those who like to realign their investments with changing risk appetite.

Purists often argue that insurance is not an investment product, so the very idea of Ulips goes against the ethos of insurance. But, says Nanda, “These products are investments backed by insurance and do not compromise on the life cover.” The chief problem so far was that agents preferred to sell Ulips as short-term investment plans instead of as long-term schemes.

The market regulator, the Insurance Regulatory and Development Authority has come down heavily on this practice. “The flexibility and liquidity of Ulips make them potent products that offer peace of mind with risk cover and scope for asset creation through investments,” says Agarwal.

Asset allocation: Apart from market-linked returns, policyholders will benefit thanks to the regular nature of savings and the benefits of compounding. “The tax treatment on these plans made me take an informed decision to park funds in them,” says Bangalore-based Sudheer Hundi, who has investments in equities, mutual funds and real estate. But there are other reasons that tilt the scales in favour of Ulips.

Financial experts drum into investors the need and benefits of asset allocation, which is akin to a healthy and balanced diet. This means that any imbalance or overindulgence in one category can have unhealthy consequences in the long run.











In light of the need for healthy asset allocation, Ulips make sense again. “The reason is simple. While returns in any single year from a specific asset class can be superior to other asset classes, over a longer period, the average returns are primarily determined by the asset mix in the portfolio,” says Nanda. We all know that market timing is not very rewarding.Again, since they are long-term instruments, Ulips score.

Although Ulips are good at all stages in life, they work best for those in the 25-40 age group. This means they can give their investment a good 15-25 years to grow. Indeed, long-term investing has always been fruitful. The added benefit of Ulips is that even at the end of the tenure, you can remain in the fund, minus the life cover, in case the market is low when your policy matures.

“One should diversify with Ulips as part of one’s portfolio,” says Agarwal. The flexibility that it offers can help to balance asset allocation, particularly in light of the free fund switches, which active investors will appreciate.