What are ULIPs?
Unit Linked Insurance Policies, or ULIPs, are a form of investment that offer both term insurance and the opportunity to build your wealth. In buying a ULIP, you get an optimum combination of term life insurance and an investment portfolio of underlying funds. A small portion of your ULIPs premium goes towards term insurance, with the remaining funds invested in a set of underlying funds. With this instrument, you control asset allocation and can choose underlying funds, be it debt, equity, or balanced.
Choosing a ULIP plan
ULIPs fund returns: Choose a ULIPs plan which is the best performer in terms of net return in its asset class, i.e., equity, bonds, or varying combinations of debt and equity. Returns vary according to the asset class and the fund manager. Debt funds returns are lower, and equity funds give the highest returns over a five-year period. The return on a balanced fund, which is a combination of debt and equity, is in between the two.
- Control: You can customise your ULIP investment to fit your risk-return profile. Depending on your age, investment horizon, and income, you can pick equity funds, debt funds or balanced funds (a combination of debt and equity). You exercise control over your asset allocation choices and can even change them during the tenure. Choose a ULIP that provides a range of fund options you can invest in or switch between depending on the ULIP plan returns and charges.
- Choice: ULIPs provide a flexible option regarding both, term insurance and investment plan amounts. As your income expands, you can choose to increase your invested amount. Choose a ULIP that allows you to expand or shrink your ULIP premium according to your income levels.
- Choose ULIPs with riders attached. Check if the term insurance element of the ULIP comes with a personal accident/disability cover or a waiver of premium if an unforeseen event occurs.
- Choose a ULIP that allows the maximum number of switches between fund choices without additional cost. Such a decision ensures your flexibility to change your asset allocation or weed out non-performing funds from the portfolio.
- Choose a ULIP in which the plan details, the schedule of ULIP charges, and the current NAV (Net Asset Value) of the fund are revealed upfront. Choose one that is online and has 24/7 customer support for your convenience. With this, you can view the current status of your ULIPs portfolio and the latest valuation online anytime, at your convenience.
- ULIPs charges: Most importantly, check the fees charged by the ULIP as you should not only maximise your investment return but also minimise your costs. What matters is the net return/yield you earn.
An analysis of ULIPs funds returns
| S.No | Asset Class Returns | Return range |
| 1. | Liquidity/Money Market/ Debt short term(1Year) | 1%- 5% |
| 2. | Debt (Long term) (1 year) | 2%-8% |
| 3. | Large cap (5 years) | 12%-16% |
| 4. | Midcap (5 years) | 10%-15% |
| 5. | Other ( 5 years) | 9%-14% |
Source: www.moneycontrol.com
A breakdown of ULIPs charges
- Premium allocation charge: This is the initial charge imposed on the premium before allocating it into two portions – insurance and savings. The normal range is 1% to 6%.
- Policy administration charges: This is the administrative charge for the maintenance of the policy, including paperwork and premium reminders. This charge could be a flat rate or a step up over the policy term. These charges start from Rs. 400 p.a.
- Fund management fee: These are charges for portfolio management services. It is usually higher for equity funds than for debt funds. The Insurance Regulation Development Authority of India (IRDAI) has capped the maximum fund management fee in ULIPs at 1.35% p.a. This fee is levied on the accumulated amount in the ULIPs.
- Mortality charges: Some ULIPS charge mortality charges, calculated based on your age, health, gender, etc. This is an insurance coverage charge. Mortality charges are usually levied once a month. The greater your age, the higher the mortality charges.
- Surrender charges or discontinuance charges: A premature surrender or withdrawal from the policy attracts this charge. Generally, ULIPs have a lock-in period of 5 years, after which partial withdrawals are permitted, as per that ULIP’s terms. The IRDAI has limited the maximum surrender charges to 0.5% p.a. of the unit fund value.
- Fund switching charges: Some ULIPs levy these charges after certain maximum free fund switches. This charge varies from provider to provider.
Key takeaways
ULIPs offer a combination of life insurance and savings in an attractive package. Most importantly, ULIPs help inculcate the discipline of saving. If you are a young millennial, starting your career with several financial goals ahead, it is a good idea to invest in a ULIP. ULIPs allow investing to meet your financial commitments and also offer your family protection from your life insurance. You can balance your career and your ULIPs management comfortably. The above pointers will help you choose the right ULIPs plan to meet your financial requirements perfectly.