ULIPs – a disciplined investment approach with flexibility and transparency

Pranav Mishra, Chief – Sales and Distribution, ICICI Prudential Life Insurance Co. Ltd.

In India, Insurance has been mentioned in the writings of Manusmrithi, Dharmasastra and Arthasastra wherein they mention pooling of resources that could be redistributed in times of calamities. Insurance has come a long way since then.

At present broadly speaking life insurance can be categorized into Savings and Protection. Within the savings category, customers have the option to choose from Traditional or Unit Linked products. or ULIPs, as they are popularly known as are new age products. Let us try and understand them.

1. What are ULIPs?

A unit linked insurance plan (ULIP) also known as goal based savings product is a life insurance product which fulfils a customers need to provide financial security to the family in the form of a life cover. It also offers a route to build a savings pool to achieve long term financial goals. A ULIP offers customers a life cover which is equivalent to 10x the annual premium. These products have a savings component and invest in debt and/or equity, thereby enabling customers to build a corpus over the long term. These products should be purchased with a 10+ year time horizon. So in case of an early demise of the policyholder the nominee/beneficiary is paid the sum assured.

2. Can I change my asset allocation and when?

Customers can change their asset allocation anytime during the year. The changing of asset allocation is known as ‘Switching’. Life insurance companies offer free switches basis which customers can switch or alter their asset allocation from debt to equity or vice versa. One can also choose to have a 100% allocation towards debt.

3. What are the charges that I have to pay?

ULIPs are transparent products and all charges are visible for the individual to see. The commonly applied charges are:

1. Policy administration –deducted on a monthly basis

2. Premium allocation – deducted from the premium paid

3. Mortality charges – for providing a life cover

4. Fund management charges (FMC) – FMC is the fee for managing the assets on behalf of the policyholder

It is mandatory to provide a benefit illustration to every individual. This benefit illustration clearly shows the various charges applicable for the entire duration of the policy. This enables the customer to understand the amount deducted and the exact amount invested as per the chosen asset allocation strategy.

4. What are the tax benefits I get?

ULIPs are tax efficient, not only does the premium paid qualify for tax deduction under section 80C. The maturity proceeds too are exempted from tax under section 10(10D), since ULIPs offer a life cover of 10 times the annual premium. ULIPs have a lock-in period of 5 years, post expiry of this period customers can make tax free partial withdrawals, if required, without impacting the life cover component.

5. In the long run are ULIPs cost effective?

ULIPs provide the customer with freedom to invest in equity, debt, and other fixed income instruments in proportions of their choice. In the long run some of the charges associated with ULIPs such as premium allocation charges and policy administration charge come down to zero. A few ULIP products offer loyalty additions and bonus in the form of units which significantly brings down the cost for the customer. In fact over a 10+ year time horizon ULIPs are one of the most cost effective savings products.