|Work best for people aged 25-40 years|
Because:These are long-term products that need an investment horizon of at least 10 years to yield maximum benefits
|Is a good investment after life insurance|
Because:They combine basic insurance with mutual fund
|It could also work as entry-level mutual fund|
Because: It allows you to switch across funds at lowest cost
|Low-cost mutual fund in the long term|
Because:Annual fund management charges in Ulips are around 1% compared with 2-3% charged by equity mutual fun
|Allow liquidity to the investor|
Because:All or part of corpus can be withdrawn after 3 year
Ulips might have caught your fancy as well for all the noise insurers and agents have made over the past few years. They have also faced brickbats from many investment experts who argue that mutual funds offer better returns and more freedom to investors. These investment experts claim that a combo of mutual funds and a term plan, which offers pure insurance at a low cost, offers better returns than a Ulip.
That’s a myth that needs to be dispelled. Ulips do charge as much as 25-40% of the premium as administrative costs in the initial years but these charges usually taper down to about 1% by the fourth or fifth year. Most diversified equity mutual funds charge up to 2.5% of the corpus value as fund management fees every year. In Ulips, the charge is lower at around 1%. In the long term, say 15-20 years, this small difference in annual fund management charge can have a significant effect on your returns. For example, if we assume that a term insurance-diversified equity fund combo and the equity option of a Ulip will both earn 10% annualised returns, the ULIP with the same life cover will overtake the fund in about 10 years notwithstanding the high charges in the initial years (see graph Long-distance runner). Says Kolkata-based financial planner Brijesh Dalmia: “In the long term Ulip charges are nothing compared to mutual fund management charges.”
That is not the only compelling reason for investing in a Ulip. Just as a well chosen tax planning fund can offer you complete financial planning, a good Ulip can be your one-stop financial plan, offering everything from tax planning to life insurance to long-term wealth creation and liquidity. You get Section 80C tax benefits on the premium paid. The insurance cover is five, 10 or 20 times the premium amount. You also have the freedom to decide how much of your corpus should be exposed to equities.
Buying a Ulip? Find out...
The fees charged by different insurers
|How many switches in a year are free|
Most insurers allow up to 3-4 switches between different options in a year without levying any fee
|How many top-ups allowed and the charge|
Insurers usually allow additional investments of up to 25% of the premium in a year
If you can increase life cover
In equity funds, any profit made from switching out of a fund within one year is taxed at 10%. In debt funds, it is worse. The profit is clubbed with your income for the year and taxed at the applicable slab rate. Assuming that an investor makes a 10% profit by switching his entire corpus from equity to debt once in two years and then reverting to equities, he would significantly boost his corpus size over 15-20 years. In any case, it is a good learning ground for investors who like to tinker with their investments every now and then.
“The free switches allow investors to see the impact of buying and selling without losing much. However, I do realise that over the long term, equities always outperform other asset classes and so will my Ulip,” says Murty.
So, what type of investors should go for Ulips? Says Pranav Mishra, vice-president (products), ICICI Prudential Life Insurance: “Though Ulips are good at all stages in life, they work best for the 25-40 age group because that gives the investment a good 15-25 years to grow.” There is an additional benefit—even at the end of the tenure you can remain invested in the fund, minus the life cover. This means you don’t have to necessarily exit if the market is at a low when the policy matures. Besides the maturity benefit is tax free under Section 10D. “Ulips are a good diversification tool because you can allocate funds to different options based on your risk appetite,” adds Dalmia.
A word of caution: Ulips work best in the long term, so commit to a premium that you can comfortably invest over the next 15-20 years. Often people make a large commitment and then exit the plan when they face difficulties in paying the premium after a few years.
Assured return schemes died a quiet death a few years ago. Market-linked investments are now the norm. This means investors must periodically review their investments.
Ulips demand that the investor has a minimum understanding of financial products and is conversant with the working of the capital markets. If you are a passive investor who does not track his investments regularly, avoid Ulips. Also, for short-term and mediumterm financial goals, mutual funds are more suitable.
But if you are seeking an investment that combines tax planning, insurance, good returns and disciplined investing, call your insurance agent right now.
Copyright©2021 Living Media India Limited. For reprint rights: Syndications Today