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The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest innovation in the field of life insurance in the past several decades.
In a swoop, it has addressed and overcome several concerns that customers had about life insurance -- liquidity, flexibility and transparency and the lack thereof. These benefits are possible because ULIPs are differently structured products and leave many choices to the policyholder.
Hence, as a customer, you must carefully consider whether you can make such a product work well for you. Broadly speaking, I believe that ULIPs are best suited for those who have a conceptual understanding of financial markets and are genuinely looking for a flexible, long-term savings-cum-insurance solution.
Put simply, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one's specific needs.
Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match one's lifestyle, inexplicable returns and an expensive, complicated exit.
ULIPs, by separating the two parts within the same product, and managing them independently, offer insurance buyers what no traditional policy had -- continuous information about how their policy is working for them.
Often, people wonder whether it's better to purchase separate financial products for their protection and savings needs. Certainly, this is a viable option for those who have the time and skill to manage several products separately.
However, for those who want a convenient, economical, one-stop solution, ULIPs are the best bet.
To understand how a ULIP meets the multiple needs of protection of both health and life; and savings in the same policy, let us take the example of a 35-year-old man with 2 young children.
With a premium of, say, Rs 30,000 p.a. he could begin with a sum assured of Rs 5 lakh, for which the life insurer would set aside a nominal amount of the premium to cover this risk. The balance could be invested in a fund of his choice, possibly a balanced or growth option.
As the children grow, he might want to increase the level of protection, which could be done by liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant raise, he could increase the savings element in the policy by topping it up.
The chart below shows how one product can meet multiple needs at different life stages.
|Starting a job,Single individual||Recently married, no kids||Married, with kids||Kids going to school,college||Higher studies for child,marriage||Children independent, nearing the golden years|
|Your Need||Low protection, high asset creation and accumulation||Reasonable protection, still high on asset creation||Higher protection, still high on asset creation but steadier options, increase savings for child||Higher Protection, high on asset creation but steadier options, liquidity for education expenses||Lumpsum money for education, marriage. Facility to stop premium for 2-3 yrs for these extra expenses||Safe accumulation for the golden yrs.Considerably lower life insurance as the dependancies have decreased|
|Flexibility||Choose low death benefit, choose growth/balanced option for asset creation||Increase death benefit,choose growth/balanced option for asset creation||Increase death benefit, choose balanced option for asset creation. Choose riders for enhanced protection.Use top-ups to increase your accumulation||Withdrawal from the account for the education expenses of the child||Withdrawal from the account for higher education/marriage expenses of the child. Premium holiday-to stop premium for a period without lapsing the policy||Decrease the death benefit-reduce it to the minimum possible.Choose the income investment option.Top-ups form the accumulation (with reduced expenses) for the golden yrs cash accumulation|
The key to good financial planning is to understand one's current and future financial goals, risk appetite and portfolio mix. This done, the next step is to allocate assets across different categories and systematically adhere to an investment pattern, so that they work in tandem to meet one's requirements over the next month, year or decade.
Because of their flexibility to adjust to different lifestage needs, ULIPs fit in very well with financial planning efforts. Moreover, as a systematic investment plan, ULIPs greatly diminish the hazards of investing in a volatile market, and using the concept of 'Rupee Cost Averaging', allow the policyholder to earn real returns over the long term.
When you're buying a ULIP, make sure you select one that works well for you. The important thing is to look for and understand the nuances, which can considerably alter the way the product works for you. Take the following into consideration.
Charges: Understand all the charges levied on the product over its tenure, not just the initial charges. A complete charge structure would include the initial charges, the fixed administrative charges, the fund management charges, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy.
It might seem confusing at first, but a company provided benefit illustration should help make this clearer. Some companies levy a spread between the buy and sell rates of the units, which can significantly reduce the value of the investment over the long-term.
Close examination and questioning of such aspects will reveal the growing power of your investment.
Fund Options and Management: Understand the various fund options available to you and the fund management philosophy and objectives of each of them.
Examine the track record of the funds thus far and how they are performing in comparison to benchmarks. Who manages the funds and what experience do they have? Are there adequate controls? Importantly, look at how easily you can access information about your fund's performance when you need it -- are their daily NAVs? Is the portfolio disclosed regularly?
Features: Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. Carefully understand the conditions and charges associated with each of these.
For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must you go through medical underwriting if you want to increase the sum assured?
Company: Last but not least, insure with a brand you can trust to honour its commitment and service you according to your requirements.
Having bought a ULIP, its important that you monitor it on a regular basis, though not as frequently as you would a stock or mutual fund. Your ULIP is a long-term investment and daily fluctuations in the NAV should not impact you.
Check once a quarter to see how your fund is performing, and consider a switch if there is a change in the level of risk you are willing to take or in your personal market view.
Monitor your fund; value it in the few weeks or months before a planned withdrawal or top-up, or a change in your lifestage or lifestyle. For those who are still finding their feet with their ULIP and its multitude of options, the best thing to do is to consult your advisor.
Life insurance as a form of protection is the single-most important financial product any earning member of a family must have. Having said this, a well-diversified portfolio is one of the first rules of financial planning, and as such one should consider different instruments as the ability to save increases. Certainly ULIPs successfully combine the first and most important need of protection, with savings, and hence are an excellent addition to your portfolio. These can be combined with various other products, after taking into account your risk appetite, financial goals and need for portfolio diversification.
Possible investment options range from bank deposits and government small saving schemes to mutual funds, stocks and property.
Buying a ULIP is quite different from buying a traditional insurance product; and sometimes there are cases of people who believe they have been mis-sold a ULIP, the complaint most often being that they were not aware of the risks or the charges.
All financial products have a certain amount of risk and charges, be it a mutual fund, property, or even a bank deposit. It would be unrealistic to assume that the features and benefits of a ULIP come at no cost, though the charges are considerably lower than that of a traditional product.
In fact, the very reason the product is transparent is because the customer knows the charges and risks. Further, unlike other financial products, all life insurance plans come with a 15-day free look, which allows you to return the policy if you believe it does not meet your needs or expectations.
My advice to those who are looking to buy not just a ULIP, but any financial product: It is your right and responsibility to ask for a company printed benefit illustration and brochure, and take some time to read, understand and question it. After all, you are committing your hard-earned money for years to come!
The author is Chief Investment Officer, ICICI [Get Quote] Prudential Life Insurance.
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