How Secure is it to Invest in a ULIP Policy?

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A ‘ULIP policy’ is an insurance product that provides life insurance cover to the policy holder. And also makes a secured investment option for those who are looking for long-term investment in bonds, stocks, and mutual funds. Until 2010, ULIPs were no less than the bad apple in the basket especially when charges soared to 7-8% and were miss-sold.

Starting from 2010, there were multiple alterations that were made by the regulator including the limits on charges. Now there are nearly 100 ULIP plans and more than 500 fund options.

What is a ULIP Policy and how it Works?

There are two components of a ‘ULIP Policy’ - Investment and Insurance. ULIP policies have a life insurance component that’s why there are mortality charges. And the fund component takes care of the ULIP returns. The Net Asset Value (NAV) of the funds is declared on a daily basis.

Basically, the returns that you get on ULIPs are the difference between the present day NAV and NAV at the time of issuance. For instance, if the NAV was Rs. 100 at the time of purchase and is Rs. 110 at the time of, then the returns on your ULIP are 10%.

Your returns will depend on which kind of fund option you choose- equity, debt, and balanced funds. You can opt for small-cap, mid-cap, large-cap, or multi-cap funds.

Looking at the past trends, five year returns on bond funds stood at 8% and mid-cap funds were 12%.

And the past trend over a period of five-years suggests that equity ULIPS have offered 4.1% returns, 9.85% in large-cap and 7.05% in multi-cap funds.  You have the option to switch between the funds' options, with minimal extra charges.

So, the insurance company pools in all the money invested by you and invest it in the chosen fund. And the total corpus is further divided into 'fund units' with a certain face value. You are then allocated 'Units' in proportion to the amount invested by you.

ULIP Policies Make a Secure Investment with Long-term Perspective

As ULIP plans have a lock-in period of five years, it makes sense to monitor your ULIPS over a period of five years or more, as it gains stability over a longer term. 

Last year mutual funds had undergone re-categorization as per the regulations issued by the market regulator. As per industry experts, this did not affect the ULIPS as the product is governed by the Insurance Regulatory Development Authority of India (IRDAI).

Irrespective of the amount that you have invested, the insurance regulator has already put capping on the charges and net reduction in yield for the investors, so that there is no impact on the ULIP returns. However, there are a few charges associated with ULIP, such as:

  • Allocation charges
  • Fund management charges
  • Administration charges
  • Mortality charges

So, before investing, it is important to consider your financial goals, the corpus, and risk appetite.

Since there is a lock-in period of five-years, it makes sense to check your own financial capabilities and goals because the insurance company will also charge if the plan is withdrawn before the completion of the lock-in period.

Therefore, ULIPS are a secure option for long-term investments only. For this reason, it is suggested to assess your risk appetite and financial portfolio because the risk-involved in ULIPS is high.

Moreover, the only a limited portion of your premium is directed towards life insurance policy, so you also need to check if the insurance cover is sufficient for you.

Is ULIP a Good Investment Option?

Do not buy ULIPS as a last minute tax-saving option or in a hurry. You need to link your ULIP investments to your long-term goals like higher education, marriage, etc. This is why you need to invest in an investment scheme that helps in boosting your income and also meet your investment goals. You need to decide on a lot of factors like rate of return, maturity period, and lock-in period.

Most debt instruments like endowment plans, come with maturity periods of 10 to 20 years. There are government-backed schemes like Public Provident Fund (PPF), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana that offer fixed return, but they also have a lock-in period of 5, 15 and 21 years, respectively.   

Therefore, looking from the returns point of equity-oriented investment schemes like a ULIP policy or equity-linked savings schemes (ELSS), they score over other instruments. And ULIPS further adds to the security quotient with the life insurance cover to the dependents of the policy holder.  

Reasons Why ULIPS are a Secured Long-run Investment?

Below are the five benefits of investing in ULIP plans that make it a secure investment option.

First time investors

As investors are slowly drifting from traditional investment schemes to market-linked investment instruments and insurance policies. With a change in the investment pattern, it makes sense for first time investors to buy a ULIP policy- solving the purpose of investment and insurance both under a single policy.

Potentially Better Returns

ULIPs can offer better returns in comparison to other insurance policies because of their equity advantage. The premium that you pay on a ULIP policy is put towards different funds in various asset classes. Historically, they have given double-digit returns and also offer tax-saving benefits. However, the maturity amount depends on how the equity market performs during the tenure. Then again, endowment plans also give a lump sum amount after the policy term, but they do protect the capital, however, they do not offer inflation beating returns.

And the best part is that the maturity amount is tax-free, which makes ULIPS a better choice among other investment options. FDs also offer tax-exemption benefits, too, but they also come with a lock-in period. But, the returns offered are added to your income and are taxable as per your income tax bracket.

Lock-in period

ULIPs help in inculcating investment disciple among the investors as they come with a lock-in of five years. You can benefit by investing in a single ULIP policy as it is a long-term insurance contract. You only buy it once and avail tax-benefit every year till the end of policy term (premium term).

In the case of ULIPS, the lock-in is calculated from the date the policy is issued. You can pay the premium on a ULIP policy on a monthly or annual basis.

Flexibility

ULIPs are popular among investors for their flexibility to switching between the funds during the policy term. You can choose among equity, growth, balanced, and income funds as per your goals and risk appetite. Usually, four free switches are allowed in the year.

Unlike shares, ULIPs keep you free of tracking companies where the fund invests in. All you need to do is select the ULIP policy; you can change the fund allocation anytime during the policy tenure and continue it till maturity to gain long-term benefits.

Dual Benefits

ULIPs, along with tax exemption of up to Rs 1.5 lakh u/s 80C of the Income-Tax Act, is a great long-term investment instrument. Historically, it has offered a minimum sum assured that is 10 times of the annual premium to investors below the age of 45-years.

Moreover, the New IRDAI guidelines have made Unite Linked Investment Plans much more investor-friendly in comparison to when they were first introduced. It has also reduced other costs like fund management charges, premium allocation charges, administration charges, and surrender charges.

Long Story Short

As you see, how a ULIP policy help you boost wealth and meet your long term financial goals with funds diversification. ULIP investment is ideal for those who are looking for a 5-year investment and want to avail of the equity advantage. Stay invested, and that’s what makes ULIPS a secured investment tool.