ULIPs and Mutual Funds are not comparable products
One of the common strategies used by insurance agents while trying to sell a unit linked insurance plan(ULIP) is to draw a comparison between the ULIP and mutual funds and show that the ULIP would provide superior returns to mutual funds over the long term and plus an insurance cover.
Comparing a ULIP with a mutual fund would be like comparing apples and oranges as they have different investment objectives, product features, investment structure, expense structures and fund management methods.
What makes a Unit Linked Insurance Plan (ULIP) so popular
Over the last few years ULIPs have become the most popular category among the insurance products.
The reason? They provide multiple benefits and have various features and options to meet the specific needs of each client.
- Life Protection – A person’s life protection needs depend on the stage of life he or she is at- young and just started working, married with children, nearing retirement etc. A ULIP allows one to choose the death benefit (subject to a stipulated minimum) which is adequate enough and also maintain a balance between life cover and savings.
- Investment/Savings – A ULIP provides the client with the option of investing as per his or her personal risk profile in the equity markets, debt markets, or a mix of the two.
- Switch option – The client can switch between the funds and manage his portfolio actively. For instance, if he finds a substantial increase in the fund value due to a boom in the equity markets, he can switch a part of it into debt and thus lock-in/protect his profits from market fluctuations. The switch option can also be used to change the fund option for future premiums as the risk orientation of the client changes.
- Cover Continuance /Premium Holiday – Insurance policies are long term contracts. Sometimes, the client may find himself facing a situation where he may find it difficult to pay future premiums. This option gives client the option of paying only for a limited number of years, or stop payments for sometime and resume when it is convenient.
- Transparency – In a traditional insurance plan, it is difficult to determine the accrued value of the policy. However, in a ULIP the investment is represented by allocated units and a NAV which is a real time indicator of the value of the investment. Hence a policyholder can easily find out the value that the policy has accrued on a certain date.
- Riders for extra benefits – Riders are extra benefits which can be attached to a policy for extra protection for a nominal charge. The client can choose from waiver of premium, disability benefit, accident benefit, critical illness riders etc.
- Liquidity – A Unit Linked Insurance Plan allows the policy holder to withdraw partially or fully (as per the specific policy plan) in times of emergency without any penalty.
- Tax Benefits – Annual premium payment up to Rs 1 Lac is eligible for tax benefit u/s 80 C and the maturity benefit is tax free u/s 10( 10D) subject to the premium not being more than 10 % of the life cover.
How does a Unit Linked Insurance Plan exactly work?
Unit Linked Insurance Plans (ULIPs) are aggressively marketed by Insurance companies as investment plans with a life cover and benefits like flexibility, market linked returns and transparency. Thanks to it, most of us are quite likely to have invested in one at some point in time.
Here is how your ULIP actually works and how and where does your money get invested from the date of payment of premium till maturity.
- Choose the premium amount, the amount of insurance you need (subject to a minimum and maximum amount as per IRDA guidelines).
- Decide the policy term and the portfolio strategy (choose from the available combinations of debt/equity) for investment.
- The premium amount less the charges is invested in to the fund of your choice.
- In case of the unfortunate death of the insured during the policy term, the insurance amount plus the accumulated fund value is paid to the nominee.
- If the insured survives the policy term, the Fund Value is paid on maturity.
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