ULIP - Unit Linked Insurance Plan

A ULIP can be a great addition to a portfolio. However, whether or not one should buy a ULIP depends on the investor themselves and their requirements. One can opt for a ULIP if one has:

1. Difficulty managing multiple investments directed towards different goals

To build an effective savings plan, it is important to invest in the right instruments and mutual funds across multiple asset classes. This holds especially true while investing in stocks and mutual funds because if a stock crashes or a certain fund underperforms for a while, the capital invested should not be lost. The idea essentially is to not keep all the eggs in one basket. An investment portfolio with diverse instruments is protected against any unprecedented market action resulting in unfavourable price action.

Finding the right mutual fund is not an easy task. Investors, especially beginners, may overlook some aspects of a scheme, such as performance history and risk-adjusted returns.
Moreover, mutual funds do not come with lock-in periods which eliminates the need to commit regular payments. This often results in a premature exit from the investment to channel funds for immediate and less important requirements. It is not conducive for long-term goals which require a more disciplined approach.

Keeping track of all investments over the years, including keeping the life insurance cover and charges in perspective, can prove to be difficult. ULIPs provide the benefit of investing in a diverse mix of instruments while providing life cover.

A ULIP offers more features than a standard life insurance policy. Most people have a protection plan in place, such as an insurance term plan, to insure themselves and their families. However, the benefit received from life insurance may come at a time where the long-term goals of the family are much later in the future. In such a case, the onus to manage the sum rests on the family. ULIPs offer a 'waiver of premium' feature that helps the policyholder ensure that their family receives funds at the time of a major financial requirement such as at the time of college admissions, or weddings. ULIPs with annuity plans

2. Long-term goals to finance

ULIPs generally have a lock-in period of 5 years. After these 5 years, the various charges associated with the policy are amortized. This means that the charges are capped at a lower percentage. Charges associated with ULIPs with a maturity period of 10 years or less are capped at 3%. In case of ULIPs with a term of more than 10 years, total charges are capped at 2.25%. Out of this, the fund management charges are capped at only 1.35%. This encourages investments for a longer term.

Either way, ULIPs generate the most value in long-term, over 15 to 20 years. This is due to the power of compound interest at play, with the aim of capital appreciation over a long period of time. By holding a ULIP, investors can save regularly towards future financial goals such as children’s education, their wedding, purchase of a new home, or retirement income. There is also the option for partial withdrawal if there is an important and absolute requirement, making ULIP a safebox for the investor’s wealth.

Moreover, ULIPs may come with the option of top-up premiums. These additional investments have charges of only 1-2%, which is lower than the charges levied on regular premiums payments. This would mean that top-ups allow for holding more units for lesser investment, effectively decreasing the average cost of ownership of each unit. Investing more in the same ULIP minimizes the charges associated with a new policy. Top-up payments also increase the insurance cover, hence providing an added benefit for investing more.

After you have taken care of all your regular family expenses, you save the balance for the future needs of the family . In other words, your family is dependent on you for their present as well as future needs. So, if something were to happen to you, there is a high likelihood of your family's dreams being thrown into disarray. But, don't worry! Marrying your investment and insurnace with these investment plans could help you secure the present and future of your family.

Even the best investments will not help on premature demise

Every investment that you make today is targeted to cater to a future goal. Ideally, you expect that once your investments mature they would help you meet your future goals. But till the time the investments mature and help the family achieve its goals there is always an element of risk.

Should something happen to you midway, this investment could very well be liquidated and prematurely withdrawn to fulfil the family's current needs. Even the corpus left after the partial liquidation will not suffice to meet the family's goals, be it child's higher education or spouse's retirement.

Insurance provides perfect support when you need it most

The risk to financial security of your family is much higher during the first half of your work life. Be it goals, such as your child's higher education or wedding, or, your own retirement, your savings remain very low in the initial phase.

For instance, if you are targeting to save Rs 50 lakh for your child's higher education 20 years down the line, and your investment earns a post-tax annual return of 8%, then you would need to save Rs 8,793 per month to achieve your goal.

But you will be able to accumulate only Rs 6.45 lakh in the first 5 years and Rs 15.93 lakh in the first 10 years, surely the sum that will not help your child fulfill her need for higher education.

It is in situations such as these that the life insurance coverage comes to the rescue and ensures that your family is able to fulfil the desired goals even in the event of your untimely demise.

Life cover fills the gap between the haves and the desired

During the course of your work life, your income will help you accumulate various assets, such as household appliances, gadgets, land, residential property, gold and deposits.

Over a period, certain assets will generate enough income to take care of your family's regular expenses. But if you are no longer there, acquiring these assets could remain just a wish, unfulfilled. Here, a life insurance cover could provide that bridge when there aren't many income generating assets available. Also, big-ticket items like car and home are typically bought with the aid of loans.

In the event of your untimely demise, your family would be left with no choice but to sell them off to repay the outstanding loan. This is where unit linked insurance plans (Ulips) from life insurance companies works so well.

They not only protect your family in your absence by covering living expenses but also allow your family members to keep enjoying the car and home bought with loans. Besides providing life cover, Ulips allow you to invest in equities which typically provide high growth during tenures of 10 years or more. The life cover ensures that other high growth investments such as those in equities besides the investment portion of Ulips still keeps growing. What's more, the cost of life insurance is quite low, especially for online plans.

Life insurance helps explore higher risk, higher growth investments

With an adequate life protection to take care of your family, you are better placed to take higher risk for higher reward investments such as equities. This will also help you go a long way in helping you save more in the long-term of 10 years or more.

Clearly, combining insurance with investment by investing in a combo product likes Ulip provides you with more benefits than what meets the eye at the first instance. The key is investing in the right Ulip.*

*Calculations shown in this article are based on assumptions which are mentioned therein and are not related to any product and are just for illustration purpose.

Short-term financial emergencies often damage your financial plans for meeting long-term needs. When faced with an emergency, we tend to reach out to investments that can be liquidated easily. That’s where the lock-in periods in investments, such as in unit linked insurance plans (ULIPs), help you stay on course.

Ensures goal Protection

Your long-term life goals, such as retirement, need big amounts. As big amounts cannot be saved in a short period, you need long-term regular savings to achieve different goals. That said, you could come across emergencies that will require you to spend significant amount of money. If you have unrestricted access to long-term investments, they could become an easy choice for liquidation, consequently, compromising your long-term goal.

For instance, a premature liquidation of long-term investments, say, your child’s higher education, to meet a medical emergency, will either compromise his education, or, he will have to take an education loan. If you take the EMI payment burden of the education loan, it will hamper your retirement savings.

If your child pays the education loan EMIs, he will save less or nothing for quite some time in his early work life. A lock-in period like the one in ULIPs, ensures that you stick to regular savings in the initial years, stay away from liquidation and successfully save the desired amount for the intended life goal.

Provides incentives to stay invested

When you start long-term investments with an ULIP, you would typically earmark it for an important goal such as your child’s higher education or wedding.

These goals are likely to be 10-20 years away. However, during the course of maintaining your regular expenses month-on-month, you might come across occasions when you would suddenly need a significant amount in a short time. It could be something like money to be raised for child’s school admission process.

These can’t be accommodated in your monthly budget or addressed through small savings at hand. If you are not allowed to withdraw money in investments like ULIP in the initial years due to a lock-in, you get to save a significant sum by the end of the mandatory 5 year lock-in period. Your temptation to liquidate a lower savings amount during emergencies will be greater compared to substantial amounts over a longer period. This, in effect, improves the chances of the money growing unhindered over the long term and providing the growth you seek. As for emergencies, you are forced to make provisions for them like an emergency fund which has liquid investments equivalent to 3-6 months of living expenses. In any case, during the emergency, you will need to look elsewhere for money and that’s where investment plans come into picture.

Helps ride out short-term turbulence

Equity is considered among the best-performing asset classes in the long-run i.e. 8-10 years or more. But, in the short term, the investments are subject to significant volatility. Individual investors, new to equity investments can get perturbed by the high short-term volatility and some even make premature exits from investments on significant market declines, losing out on long term growth opportunity. However, thanks to the minimum 5 year lock-in in ULIPs, which also help you tap the long-term growth potential of equities, you can’t make a hasty and premature exit. Over time, you get used to the turbulence which settles down to more stable returns in the long term investment plans as the investments cross the 8-10 year mark.

Investors typically prefer the best investment plan where they can access their money during emergencies. Many times, this facility does more harm than good since people end up nullifying their hard work done over time with ill-considered premature exits from long-term investments. Lock-in periods in investments such as ULIPs ensure that you short term emergencies don’t hamper your progress towards cherished goals such as child’s higher education.

Fund value simply is the net asset value or NAV of a fund on the given day, multiplied by the number of units held by the investor.

For example, if a fund's NAV is ₹ 50 and an investor holds 3000 units of the fund, the fund value for the investor will be ₹ 50 x 3000 = ₹ 1,50,000.

Comparing the initial and current NAV shows a fund’s progress and returns earned.

The main feature of ULIPs is that they are insurance plans that help build long-term wealth with their market-linked investment options. They offer a high return potential while also providing dual tax benefits, both on premium payments and on payouts/sum received after maturity.

^{*As per Income Tax Act, 1961. Tax benefits are subject to changes in tax law.}

Investors that have been regular in their premium payments can opt for paying ‘top-up’ premiums, which are additional investments towards the plan. Investors can tap into the potential of a ULIP with good performance history and good returns with these extra premiums.

Yes. Policyholders can opt for a single premium ULIP which requires a one-time payment at the time of purchase of the policy, instead of regular premiums. After the maturity period, the policyholder receives the sum assured. Top-up premiums for these ULIPs may not be available during the first 5 years.

Most ULIPs have a lock-in period of 5 years after which the policyholder can choose to withdraw a part of their fund, if the need arises. This is done by ‘cancelling’ some of the units held. There is a limit to the amount that can be withdrawn and it may vary across plans.

The entire fund value is paid to the policyholder if a ULIP is surrendered after the 5-year lock-in period. However, the process of surrendering the policy before 5 years is different. The amount will be paid to the policyholder only after the end of 5 years. However, the insurance provider will deduct discontinuance charges from the fund value. The balance is transferred to a Discontinued Policy (DP) fund and a fund management charge of not more than 0.5% is applied. The DP fund will earn interest over time to provide the minimum return guaranteed by the provider.