ULIPs: Should I buy a Unit-linked Life Insurance Plan? If yes, then what should the investment horizon be?

I want to invest in a product that can provide insurance coverage with some investment exposure. I am a conservative investor, not so greedy to make huge returns, but decent recent are welcome. Should I buy a unit-linked life insurance plan (ULIP)? Also, let me know when one should not buy ULIPs?

Name withheld on request 

Reply by Srinivas Balasubramanian, Head of Products, ICICI Prudential Life Insurance Company Ltd. 

ULIPs are good to consider for long-term financial goals, i.e. any goal of 10 or more years into the future. Typical goals in this category are planning for a child’s future education or one’s life after retirement. ULIPs help one to create long-term wealth and achieve their financial goals.

What makes ULIPs ideal for such goals are two key features that incidentally are non-negotiable elements of any robust financial plan: asset allocation and systematic long-term investment.

Asset allocation: ULIPs offer the flexibility to choose the asset allocation based on your investment preference, i.e., you can decide what exposure you want in equity and debt. ULIPs also allow you to switch between asset classes, i.e., equity and debt, without additional charges.

Individuals in their 30s can opt for a higher allocation towards equity as the risk-bearing capacity is higher. Meanwhile, investors with a low-risk appetite and those looking for capital preservation can consider investing in ULIP debt funds which offer dual benefits of tax savings and secure and stable returns over time.

Long-term investment: A plan only succeeds if you stick to it for the long term. Similarly, a financial plan will only work if one has the discipline to stick to it. In ULIPs, there is a lock-in period of 5 years, which can be considered a discipline factor as you have remained invested for the minimum tenure of 5 years. This prevents customers from making the cardinal mistake of financial planning, which is to give in to the twin emotions of greed or fear.

In short, ULIPs remove emotion from financial planning. Additionally, the life cover component offers financial security to the family in case of any eventuality. Let us take the example of an individual who invests in a ULIP, paying a yearly premium of Rs 50,000 and opting for a sum assured of 10 times the premium. The sum assured offered by the plan amounts to Rs 5 lakh. In the eventuality of the policyholder’s death within the policy term, the nominee will receive Rs 5 lakh (sum assured) or the fund value (whichever is higher). The minimum life cover (sum assured) offered in most ULIP plans is 7 times the annualised premium. However, one can choose a higher multiple depending on the appropriate cover that one is looking for.

Also read: I want to invest Rs 20,000 in mutual funds via SIP. Should I invest Rs 4K each in large-, mid-, small-, flexi-caps and balanced funds?

Last but not least, ULIPs offer a tax-efficient mode of building long-term savings, as one can invest up to Rs 2.5 lakh annually for the duration of the policy and take home a tax-free maturity amount.

Thus, one must consider Ulips only when they have a long-term goal and can pay the premium dedicatedly until the policy premium period ends.

(Views expressed by the investment expert are his/her own)