Financial planning entails two important aspects – wealth creation from the money invested and security fordependents in case of an eventuality. Unit linked insurance plans (ULIPs) offered by the insurance industry takes careof both. These plans provide an optimal mix of insurance and wealth creation based on the investors’ risk-returnprofile and investment horizon. In fact, ULIPs have become more attractive after 2010 thanks to lower costs. Sinceselecting the right ULIP can be arduous, investors can refer to CRISIL’s recently launched ULIP rankings as an aid to this process.
What are ULIPs?
ULIPs are a long-term investment product which provide investors the opportunity to generate wealth and an insurance cover until the product maturitydate. Insurance cover is a minimum of 10 times of its regular premium amount for age at entry below 45 years and 7 times for age at entry above 45years. Coverage can also be increased based on the investor’s preference. Meanwhile, wealth is created through investment of the investor’s money inequity and debt, again, based on the investor’s preference.
ULIPs also offer the following advantages:
Asset allocation with free switch advantage - ULIPs offer variousasset allocation plans as per the risk appetite. An aggressiveportfolio has higher allocation to equities, while a moderateportfolio invests in a balance of equity and debt. A conservativeportfolio invests in gilts and bonds. Investors also enjoy theadvantage of free switching among plans at various time framesbased on market conditions or change in risk appetite. While fewinsurers allow unlimited switches in a year, some have put amaximum cap on the number of switches in a year.
Transparency - ULIPs are regulated by Insurance Regulatory andDevelopment Authority of India (IRDAI) and all insurancecompanies have to mandatorily disclose all charges and costsincurred in managing the product. The structure of ULIPs hasevolved since 2010 after the regulator announced variousguidelines to make the product more transparent and safeguardinvestors’ interests. The guidelines include cap on variouscharges, lock-in period being raised to five years from threeyears, and increase in minimum cover.
Net reduction in yield was capped at 3% for term less than orequal to 10 years and 2.25% for term more than 10 years. Apart from this, the regulator capped the fund management charge at 135 basis points,irrespective of the duration of the policy. It also directed insurers not to ask for surrender charges on policies from the fifth policy year onwards.However, the mortality and morbidity charges are not a part of the overall expenses.