A few years ago, insurance was associated only with morbidity, claims and tax savings. Today, insurance is seen as an instrument that can also help plan and save for the future. This change can largely be attributed to unit-linked insurance plans or Ulips.
With rising GDP and increasing per capita income, Indians are not only saving more, but also planning and investing more. No longer new to the domestic investor, Ulips provide standard life cover, as well as transparent and flexible investment options.
Need for flexibility: At different life stages, individuals have very different needs, and varying appetite for risk. An investment product must be adaptable enough to cater to these varying requirements. Traditional insurance plans do not offer this flexibility. However, Ulips can be adapted to meet changing needs.
Flexibility in a long-term plan is very important as individuals’ savings needs and risk profile changes over time. Take a look at how needs change depending on the investor’s stage of life.
» A young, single individual has the ability to try and maximise long-term returns, so makes a higher contribution to equity.
» At age 30-45, there is a need to start saving for the family. Depending on risk tolerance, he will need equity and balanced investment options.
» At age 45-55, risk tolerance could reduce, so balanced and debt funds may be most suitable.
» From age 55, there is a need to protect the investments made. It also becomes important for investments to earn a steady income. Debt-oriented plans are good choices at this stage.
Easy asset allocation: Ulips, compared with traditional life insurance plans, can provide risk cover across asset classes, providing you with a choice of investments suited to life-stage requirements and risk profile. There are even options that offer capital guarantee, which is what risk-averse investors seek.
With Ulips, you can define your own asset allocation mix and modify your exposure as your needs change. Switching funds across asset classes is permitted a few times a year. This allows for an ability to protect gains with changing risk-appetite and needs.
You can also use Ulips as protection from inflation. Your premium payments and sum assured can be inflation index linked, providing a buffer against the loss in the “real” value of the planned future corpus due to inflation.
Regular savings: Ulips create a disciplined approach to savings through regular premium payments. These plans have clearly defined charge structures and illustrations with fixed return projections. Daily declaration of the net asset value helps you keep track of the policy’s value. Periodic portfolio disclosure also increases transparency.
Finally, Ulips are covered under the exempt-exempt-exempt tax structure, which means premium payments are taxexempt under section 80C. Returns and maturity proceeds are also tax-free under Section 10(10D), subject to conditions.
Anil Sahgal, Chief Investment Officer, Aviva Life Insurance