Five Reasons Why ULIPs Are Good

7/29/2019 Five Reasons Why ULIPs Are Good

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Five reasons why ULIPs are good

Lovaii Navlakhi

Unit Linked Insurance Plans are products that combine insurance and investment. These are long termproducts which involve commitment and discipline. The mindset is such that one can cancel aninvestment easily but is less likely to discontinue an insurance policy and hence such products sometimes

become ideal for long term goals like childrens education and ones own retirement.

5 reasons why ULIPs are good:

Flexibility to switch between equity and debt: Most insurance policies have at least a few switches free

in a year, making switching between funds free of cost.

No capital gains: When switching between funds, there is no component of capital gains which makes

it cheaper than mutual funds/other investments; where a switch from scheme to another would attractcapital gains tax. This makes the switch convenient and cost effective.

Tax: An investment upto Rs.1 lakh is deductible under Sec 80C and the proceeds which will be

received on maturity will be tax free (this is subject to the condition that the total annual premium paidshould not exceed 20% of the Sum Assured)

Goal is protected: When adequate insurance is taken for a particular goal, irrespective of what

happens to the policyholder- the goal will be met. Peace of mind is guaranteed in such products whereupon the death of the policy holder the fund value is paid out and at the end of the tenure- which is whenthe goal is due- the sum assured is paid out again.

Commitment: ULIP is a long term product; commitment and discipline is ensured when a person opts

to invest in ULIPs where there will be surrender charges if the investor wants to exit in a short time.

5 factors that work against ULIPs:

Expenses/ Charges: Considering mutual funds are virtually free now (with the abolition of entry loads);

the charges in ULIPs can make them an expensive investment option.


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Transparency: Portfolio disclosures are not made regularly and as openly as a mutual fund, thereby

reducing the transparency quotient in this product.

Fund management: If the fund management of the ULIP is not good, the investor does not have the

flexibility to just exit that ULIP and invest in another. This would have been possible in a mutual fundscheme where if the fund has not performed well- the investor has the option to exit; whereas in ULIP- he

doesnt have that option.

Expertise: The fund management may have expertise in one kind of asset class and be lousy at

another in a ULIP and the investor would be stuck with no options. In a mutual fund for example Fundhouse A may be good at managing debt and Fund house B may be good at managing equities and you

could invest in both; you wouldnt compulsorily have to invest in Fund As equity scheme just because

you invested in their debt scheme.

Reputation: ULIP bashing has been peoples favorite pass time as advisors have mis-sold this

product or people have misunderstood while investing in it.

If an investor is aware of all the charges and factors which affect his investment before taking the plunge,ULIP is actually be a good product to be in, provided it meets his criteria of investment. The starting pointof course is having a financial goal and ensuring the sum assured matches that goal in quantum andmaturity date, and then having the ability to make the regular premium payments.Consumers have always been sold Ulips as investment plans, which offer a money minting proposition. The truth is, all of thesethings told to us by our so called financial service advisors and planners as insurance companies prefer to call them are completelyfake and baseless.Since the past couple of years, the insurance industry regulator Irda has been coming up with regular guidelines that have helped

consumers immensely. One of such initiative was introduced in September 2010, where the commission on ULIPs was drastically

reduced, making them a good investment option. And this is around the time when agents stopped selling Ulips and picked up

traditional plan, which are a non effective corpus building plan for the consumer.

Due to this dramatic change in the scenario, insurers were forced to offer Ulips which were low on cost and high on returns (since

majority premium was invested in markets) to the consumers through an alternate means of distribution, ie, online. But considering

the risky nature of a Ulip investment, the consumers found themselves lost in a maze of products, all of which stated that they were

the best for them. If I look at the market today, there are four major types of Ulips available:

a.Standard Ulips with allocation charges sold by agents

b.Ulips which could be bought online with low or 0 per cent allocation and other charges. Because of low distributon margin,

distribution channels dont push these products.c.Ulips which offered capital guarantee, i.e., they assured the policyholder to returnthe capital invested by him, less of any charges

d. Ulips with highest NAV guarantee, ie, the companies would calculate the maturity returns basis the highest NAV recorded a

certain set of time as declared in the policy

Within this four types there are about 500 odd ULIPs and for a customer to choose a better one could be a daunting task. Here are a

few steps which could help you:

Investment objective

a. For savings, we need to look at Ulip with a non-guaranteed return plans, in case, the policyholder is below 40 years of age. Or

else, for a policyholder above the age of 40 years, should choose for a guaranteed return plans.

b. For corpus building, a traditional Ulip with no guaranteec. For a retired person a Ulip with guaranteed return is a good option

Premium to be paid

Insurance is a long term contract ranging from anywhere between 10 years to 30 years. Most plans require you to invest regularly

as long as your policy term. A policyholder can surrender the policy in case of a financial crunch. But it is always not advisable to

stop paying your premium.

Charges and options

What are the charges under the plan, lower the charges higher the return.The current NAV of the plan and the type of fund options available. Although currently investment performance is not measured

while investing in insurance, a customer must check the same vs benchmark. Usually MF customers review fund managers


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creditability and previous performance of fund, while insurance we usually over-look this, butI will advice customers to review the

same.

These 4 simple steps would surely help a consumer to narrow down the list of searches and choose plans which are low on cost

and high on efficient returns.

ELSS and its comparison with ULIP

December 2, 2011 bysknlakshmi

Tax planning will soon be on everyone's mind . Now Indian tax payers have multiple tax saving options available in the market but the most critical part is making

the right choice. The very first question come into mind is, which scheme will help save tax while maximizing returns. Although, traditional tax saving instruments

like Public Provident Fund (PPF) and National Saving Certificate (NSC) been hot favorite since long, but now Indian economic growth has opened up a large number

of other avenues.

Generally, people have a limited amount to invest and confused whether to invest such limited amount in stocks to gain maximum long term return or to invest in tax

saving investment which fetch low return reduce tax burden. It is very difficult to find a solution. In such a situation, it is possible to get benefit of both combined in

a single investment? Yes, it can be got through Equity Linked Savings Scheme.

Equity Linked Saving Scheme, as the name suggests it is a saving scheme which invests in the equity market. ELSS is a special category of mutual funds that invest

mostly in stocks. They are very comparable to diversified equity funds.

Equity investments give the best returns in the long run. And also, investing in stocks through mutual funds is a better way than direct investment. The main purpose

of investing for most investors is tax saving. Combination of all these factors in to one investment option is ELSS. Equity linked saving schemes (ELSS) help you

save taxes as well as generate decent returns.

All investments in Equity Linked Savings Scheme (ELSS) are eligible for benefit under Section 80C of the Income Tax Act. Of course, this is subject to a ceiling of

Rs. 1 Lakh per year, like other tax saving avenues.

Features

ELSS is a special category of mutual funds that invest predominantly in stocks. They are very comparable to diversified equity funds.

The only difference between regular diversified equity funds and ELSS mutual funds is that there is a lock-in period of 3 years. It means that once you

invest in ELSS MF, you cant withdraw your investment for a period of 3 years.

It might seem odd to have a lock-in of 3 years for a mutual fund, but compare with other tax saving investment avenues like the lowest lock-in is 5 yearsfor bank fixed deposit, and it can go all the way up to 15 years for Public Provident Fund (PPF). So, the lock-in for ELSS is the lowest among ALL tax

saving investment avenues!

This lock-in period helps to increase the fund value. Usually, fund managers keep a portion of the mutual fund corpus, around 7-10%, as cash, so thatthey can meet all redemptions. This cash is invested in very short term investments, generating meager returns. This impacts the overall returns of the

MF.


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Since the fund manager of an ELSS knows that you would not withdraw your funds for 3 years, he can invest all your funds, and thus, no part of yourinvestment would be sitting idle as cash. Thus, you get superior returns through ELSS. The lock-in period prevents unnecessary withdrawals and helps

your money grow over a period of time.

If you use the dividend re-investment option then the amount re-invested will be treated as fresh investment, and will be locked in for 3 years from thetime of re-investment. It is best to go for the Dividend or Growth opt ion of the ELSS youre buying.

The true measure of ELSS schemes worth is consistency.

Over the last two years, these funds have shifted their focus from large-caps to mid-caps. This year, a majority of them began investing substantialamounts in small-cap stocks. Today, more than half o f the funds in the category have mid-cap dominated portfolios (total investments).

Investing in such funds is no easy task. There are 24 such schemes to choose from. Unlike the Public Provident Fund or the National Savings Certificate, the returns

here are not guaranteed. Returns from equity depend on the stock market and are very volatile. While there is a chance at earning handsome returns, the likelihood of

incurring losses is also high.

Hence ELSS is for someone else

Younger - The younger you are, the greater the amounts you can think of investing in these schemes.

Tax purpose Persons who really wanted to reduce the tax burden and to enjoy the benefits of equity market.

Ready to take RiskPersons who are ready to take risks associated with equity markets.

Ready to invest in SIPIf any one decided to invest in ELSS, SIP method is the best way of investing in equity markets. Lump-sum investing in anequity fund could be dangerous. Because you may end up investing when the market is at the peak of the Bull Run.

Advantages of ELSS

The returns are great and comparable with diversified equity schemes.

Investor can opt for dividend option and get some gains during the lock-in period

Investor can opt for Systematic Investment Plan (SIP) to make investment in small monthly installments

Some ELSS schemes also offer personal accident death cover insurance

Potential to give higher returns as compared to NSC and PPF

ULIP and ELSSA comparison

In todays scenario , When we think of insurance, immediately springs to our mind is ULIP. ULIPs from life insurers have been the preferred flavour fora lot of people who wish to invest through insurance. The main attraction is the tax break under Section 80C of the Income tax Act, 1961. ULIPs

basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and

government securities.

But if talk about pure tax saving schemes, then we have the option of investing in tax-saving funds/equity linked saving schemes (ELSS).Which offersimilar tax benefits.

Similarity - For both ULIPs and ELSS, you have to invest once and the investment is locked in for minimum three years. Under the present tax laws,what you get on maturity is tax-free.

The biggest difference is that ULIPs give you a life cover, while ELSS does not.


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So in ULIPs ,the mortality cost of insuring your life is deducted from the value of the fund every month. When the plan matures, thevalue of the units, or fund value, is yours. If a policyholder dies during the plan term, the higher of sum assured or fund value is paid to the

beneficiary.

In an ELSS, the amount invested is subjected to only two charges. One is the entry cost or the load, which is normally 2.25%t of the amountinvested. After the units are allotted, there are recurring charges also called the expense ratio. For ELSS, the average is around 2.25% of the

fund value, while the maximum permitted is 2.5%.

For ULIPs, first there is the premium allocation charge ,it ranges from 2 to 4.5% for amounts below Rs 1 lakh, and goes down for higheramounts. Then there is fund management cost, which is similar to the MF recurring expense ratio. Further, there is the mortality cost, which

is based on the difference between the sum assured and the value of the fund. Some ULIPs also carrying a surrender charge for exiting the

plan in the fourth and fifth years as we ll. Then there is the policy administration charge. It is deducted from the fund va lue either as a

percentage, a fixed sum every month, often based on the sum assured.

Irrespective of how the charges come in, the post-charges returns from most ULIPs is below that from the ELSS funds for lower amounts.Lower front-end costs often come with higher mortality rates and policy administration charges, and so on

While in ELSS your entire investment will be in equ ity. ULIPs give you the choice of investing in equity or debt instruments, or both, andthe choice to move from one to the other.

After looking at the above comparison, although an ELSS looks more favorable, an individual should keep in mind that these tax-saving funds invest100% of their corpus in equities. Balanced or debt schemes are not available for availing the tax benefits under Section 80C.

Therefore, individuals who do not have the r isk appetite for equities could opt for a balanced ULIP, as tax-saving funds would be too risky for them.

Also, a ULIP offers an individual the choice to 'protect' his portfolio if need be by way of a restructure. He can shift his money from high-risk equities todebt or go for a balanced portfolio, unlike investments in tax saving funds where he e ither could holds on to your investments or sell them.

Besides, many insurance companies have introduced ULIPs with a capital guarantee. This product protects individuals from a potential market slide. Incase of a market slide, the insurance company purports to at least return the premia paid by the individual.

Hence we can conclude by saying, individuals who have the stomach for taking risk can separate their investment and insurance needs. They can consider the option

of buying a term plan separately and investing ELSS. Whilst investors who do not have an appetite for risks, but who would st ill like to add a dash of equity to their

portfolio, could look at investing in a balanced ULIP.

Insurance with an investment componentAshish Gupta, ET Bureau Jan 9, 2011, 05.02am IST Tags:

unit-linked insurance plans|

IRDA|

insuranceULIP offers insurance, safety and growth.

Unit-linked insurance plans (ULIPs) are among the most transparent flexible long-term goal-based retail investment products. They provide

protection as well as create wealth. A part of the premium is used to provide life cover, while the rest is invested in funds selected by the

policyholder, from a range of options with different debt and equity exposure, on the basis of the investment objectives and risk appetite.

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investment horizon reduces the volatility and leads to consistent wealth maximisation.
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ULIPs provide policyholders some flexibility to meet their changing needs. They can select their own asset allocation by choosing fund

options, redirect future premiums to different funds and switch between funds in the light of changing risk appetite and investment objectives.

ULIPs offer a very high degree of transparency as all the charges, fund NAVs, portfolio, performance, assets under management, asset

allocation, rating and maturity profile are stated clearly. A policyholder is allowed partial withdrawals and can avail loans against the ULIP.

ULIPs offer a minimum insurance cover of 10 times the annual premium for policyholders below 45 years and seven times for those aged 45

years and above. The charges are evenly distributed in the initial five years.

Further, the difference between the gross and net yields and the discontinuance charges, which need to be paid by policyholders on

premature exit, has also been capped. Investments in ULIP are covered under Section 80C of the Income Tax Act.

Notable recent changes are the increase of lock-in period and cut in the commission given to the agent.

ULIPs with new guidelines incorporated into them have been available since September 1, 2010. The increase in lock-in period from 3-5

years is applicable to each and every ULIP.

Policies that have lapsed, surrendered or discontinued during this period will receive no residuary payments. Residuary payments for policies

that are lapsed, surrendered or discontinued while they are still under the lock-in period would be paid only upon completion of the lock-in

period.

If any additional payments are made, they will be considered as single premium for the insurance cover.

It is mandatory for all ULIPs to provide at least mortality or health cover, except in case of pension and annuity products. At any given time,

the annual health cover should not be less than 105 per cent of the premiums paid. Every ULIP pension or annuity product must present aminimum guaranteed return of 4.5 per cent per year or as mentioned by IRDA periodically on the date of maturation.

The maximum loan on any ULIP should never be more than 40 per cent of the net asset value, if the equity of that particular product amounts

to greater than 60 per cent of the entire share; and it should not be more than 50 per cent of the net asset value of that particular product if

debt instruments add up to more than 60 per cent of the value.

Documents

Five Reasons Why ULIPs Are Good