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How to get the best out of your Ulip
Sunil Dhawan, Outlook Money
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January 21, 2008

Your insurance broker can give you more options than the cocktails available at the bar. In less than a decade, the number of insurance companies has increased manifold. Against just one insurer in 1999, today there are 24 insurance companies operating in India, of which 16 are in life insurance.

And, the party is still on with more and more adding to the numbers. Not surprising then that they are dishing out new fare and variations to suit different needs.

The crowd at the bar is around the unit linked insurance plans (Ulip). Enthralled we watch as the agent throws 30 per cent a year forecasts as easily as the bartender chucks bottles in the air.

In most cases, Outlook Money would rather unbundle the insurance and investing and go for a term plan and a mutual fund, but there are those for whom Ulips work because they instil a discipline in their investing for the long term.

If, however, you have bought to in one of the Ulip parties without really knowing what the bartender mixed for you, here are a few tips to still stay sober.

Party hard, and it will get better

Ulips are typically long-term instruments, so you need to stay in the party for long. Your money will touch new highs only from the 10th year or so, when the benefit of compounding really kicks in.

So, if you have bought a Ulip, do not surrender it even if you can do so at zero or minimal cost after the third or the fifth year unless you are in dire straits. If you really need cash, make a partial withdrawal.

Cost structures of Ulips, too, are such that they work for you after about the 10th year. For instance, many Ulips come with a high premium allocation charge. This is charged every year on the premium you pay and leaves that much less for investment.

Many schemes take away as much as 25 per cent in the first year. It then tapers off quite dramatically and is flat over the next many years. Since this is a front-end charge, you will have to pay it and not reap the benefit unless you stay invested.

If you have bought an actuarial funded plan, the solution is to stay there and let it run its full course. Two life insurers, Aviva [Get Quote] and Bajaj Allianz, used to offer these products till they were asked by the Insurance Regulatory and Development Authority to phase them out. These were back-loaded plans, where you would be charged a hefty sum if you tried to surrender any of them within a certain period of time.

Look for excitement

If you are using Ulips for investment, you may as well get the highest returns you can. Use the fund switching facility to move your entire fund to an option with at least 70 per cent equity. Ideally, if you are looking at a long-term relationship with the product, go for a 100 per cent allocation, since your exposure to debt products is already coming through your provident fund (PF) contributions.

Ulips are long-term products and over such periods, equities outperform all other asset classes. If, however, you are close to retirement, think twice before opting for the equity option of the Ulip. Also, redirect future premiums into this option. Many insurers let you switch funds online. Register for it and get the username and password that lets you use this facility.

Don't overdo it

As risk of death, disability and illness increases with age, so does the cost of insuring your life, which is done by paying mortality charges. These charges are met from the fund value. There are two types of Ulips -- Type I and Type II. A Type I Ulip pays the higher of sum assured or fund value as death benefit, while Type II pays the sum assured as well as the fund value.

In Type I, when your fund value becomes equal to or greater than your sum assured, there is no further mortality charge. So, if you feel you need a higher cover, ask your insurer to increase the sum assured in your existing plan. It may, however, be subject to certain limits and fresh medical tests. If you own a Type II Ulip -- the need for doing this would probably be less, but you could still do so. As a thumb rule, your insurance cover should be five to seven times your gross total annual income. If your Ulip can give you this kind of insurance cover, you can do without term life insurance.

Top up

If you find that your Ulip is giving you good returns, you can use the 'top up' facility to park investible cash. Top-up premiums are amounts you invest in your Ulip at irregular intervals, over and above the regular premium. This top-up comes at a cost of about 2 per cent of the investment in most Ulips (mutual funds cost 2.25 per cent to invest in fresh) and has a lock-in period of three years. The top-up amount can be invested in the debt option even if your premiums are being invested in the equity option, or vice versa. The ongoing recurring cost, or the fund management cost, is around 1.5 per cent in most Ulips (funds cost 2.20 per cent). At any time during the policy term, as long as the total of top-up premiums does not cross 25 per cent of the total regular premiums paid till then, you do not need to buy an insurance cover with the top-up premium.

Don't pick up the premium holiday tab

It is likely that the agent who sold you your Ulip told you that you can stop paying premiums after the first three years. If you are planning to go on the 'premium holiday' mode, make sure there is no 'premium holiday charge'. Also, some insurers insist that you give in writing that you want to stop paying premiums. If you do not meet that condition, the insurer can compulsorily foreclose the policy after a certain amount of time.

Keep in touch with your agent

Stay in contact with your agent. Remember, the agent will get a bit of every premium you pay. Make sure you engage him regularly to enhance the value of your policy by using the various features it offers. If he suggests a new policy, remember to check whether your existing policy fails to meet the goals that the new policy promises to meet. Review your plan regularly and tweak it, if needed.


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