Types of Unit Linked Insurance Plans in India
21st Dec, 2012
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Unit Linked Insurance Plans, or ULIPs as they are better known, have emerged as a preferred choice of insurance-cum-savings vehicle for many Indians in the last decade. Many investors have invested in ULIPs to meet their various financial goals, be it child education planning, house purchase planning, or retirement planning. Yet, many people have not understood the concept of ULIPs and hence ended up buying wrong product.
So what are ULIPs?
When we talk about insurance as an investment option, ULIPs are the products that suit the profile. ULIP is an insurance policy which provides dual advantage of insurance as well as investment. Here the premium which you pay is divided into parts – one part (small portion) is used to provide insurance and the other part (the larger one) is used to buy units for investment. This enables the buyer to secure some protection for his family in the event of his untimely death and at the same time provides him an opportunity to earn a return on his premium paid. The value of investments alters with the performance of the underlying fund chosen by the investor. Hence, the investment risk is borne by the investor.
Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Hence investors can decide to invest their money in line with their market outlook, time horizon, investment preferences and needs. Different funds have different risk profiles. The potential for returns also varies from fund to fund.
How do ULIPS work?
We have seen many investors blindly going for ULIPs without understanding the nature of the product and hence ending up with an unwanted policy.
When you decide the amount of premium to be paid and the amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation Charge, and varies from product to product. The rest of the premium is invested in the fund or a variety of funds chosen by you. Mortality charges and ULIP administration charges are thereafter deducted on a periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fund management charges are adjusted from the NAV on a daily basis.
Since the fund of your choice has an underlying investment – either in equity or debt or a combination of the two – your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity.
What are the types of investment one can make in ULIPS?
At the time of initial investment you can chose which funds to go for depending on your investment objective. There are many options available to you to choose from as can be seen from the following chart:
One of the big advantages that a ULIP offers is that whatever be your specific financial objective, there is a ULIP which you can choose from.
Equity Fund ULIPS – These ULIPs mainly invest in equity stocks. The investment pattern can range between 60%-100%. The investment objective behind investing in such products is to meet long term goals like retirement planning, child education planning, etc. These investments come with high risks and returns. The minimum investment horizon for such investments should be at least 5 years.
Debt Based ULIPS – Quite contrary to equity investment based ULIPs, debt based ULIPs are safer and hence returns are very predictable. These investments are normally meant for short term goals. Alternatively, one can utilize this category to shift funds from equity funds as the goal maturity comes closer by using fund switching facility. Through this option, one can move from equity to debt fund and vice versa at any point in time.
Highest NAV Guaranteed ULIPS – These are capital guarantee products that ensure that the amount you invest does not lose value and you get some upside of equity as well. However, it is foolish to assume that you will get a Sensex-linked return, with zero risk. Moreover, the highest NAV is only possible if you stay throughout the tenure of the fund. These plans pay the highest NAV achieved by fund units over a specified period of time ranging between 7 and 10 years. They work on the Constant Proportion Portfolio Insurance (CPPI) model which, while limiting downside in the event of falling stock markets, also tends to constrict gains and leverage that could be achieved through participation in rising markets. In such plans, given the guarantee, over the policy term, a significant portion of the fund stays invested in debt market instruments. Depending on the percentage of guarantee offered, there is also usually a separate guarantee charge, which lowers the investment component. Such plans will appeal to investors with lower risk appetite who do not mind foregoing higher equity returns and paying extra charges for the sake of guarantee.
In a nutshell, it can be quite a considerable task for a novice investor to choose from the various investment options available. Therefore it is always advisable to take the help of a financial advisor before committing your hard earned money.
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