Everyone’s top concern is providing financial protection to their loved ones. One must continue saving in order to satisfy the longterm needs of their family as well as their own retirement. Unit-linked insurance plan (Ulip) meets the need of those who are unable to do these two things independently. An insurance product, a unit-linked insurance plan (Ulip) combines protection and savings of the individual. One needs to pay a premium until maturity unless one picks a limited premium payment period. Consequently, saving through Ulips turns into forced saving because the policy needs to be renewed annually. Additionally, in contrast to the past, the majority of charges in Ulips are now uniform and distributed during the first five years of the policy.
Investing in Ulips to meet long-term goals might not suit everyone. For those who lack financial discipline and are unable to manage protection and savings separately, Ulips fits the bill. Many investors who are in a position to identify the right mutual fund schemes for their needs and simultaneously get protection through a pure-term insurance plan may easily avoid Ulips. Ulips, however, because of its lockins and longer horizon instills investing habits in investors.
Ulip is one such tax saver which suits investors who do not have financial discipline and inclination to keep investment and insurance separate but yet need to save for their longterm goals. Additionally, they still need to take adequate life cover preferably through a pureterm insurance plan. The premium paid, after deduction of initial charges, if any, is put into different asset classes or fund options.
Most Ulips offer several fund options across equity and debt asset classes and in addition offer strategies to make optimum use of them. Although there’s no exit cost after five years across all Ulips, it’s bad to exit after 5 years. Review their performance after five years and exit only if returns are way below the benchmark. Ulip funds generally deliver returns in tandem with the markets. Run it longer till your pre-decided maturity. Use the feature of partial withdrawals during the term of the policy to fund intermittent needs such as meeting petty expenses for kids or even education and marriage needs.In most Ulips, there are 5-10 fund options with varying asset allocation between equity and debt. Further, within equity funds, there could be those primarily in large-caps and some in mid-cap stocks. Few have multi-caps and thematic exposure too. Under debt funds, the range could be from liquid to short-term and long-term debt funds. Any switching among such fund options irrespective of the holding period is exempt from tax.
Considering the longterm nature of goals, one doesn’t need to time the markets and hence avoid the temptation to switch between funds every time the market moves 500 points up or down.
Investment strategies in Ulips
The premium may be allocated in any of the large-cap, mid-cap or small-cap equity funds or even in the debt funds of a Ulip as per one’s choice. It refers to a fixed portfolio strategy. Thereafter, the policyholder may choose to change the allocation proactively online or offline by making a switch.
In addition, Ulips offer the following strategies for the benefit of the policyholder.
1. Automatic Transfer Strategy
Similar to systematic transfer plans (STP) in mutual funds, there is ATS - Automatic Transfer Strategy in Ulips. Under ATS, one may park the premium initially in the debt fund and then systematically transfer a certain fixed amount each month into any of the chosen equity funds. One of the advantages is that it doesn’t expose the entire premium to the stock market and secondly helps in accumulating units at a lower cost through rupee-cost averaging. ATS can be known by different names such as Automatic Transfer Plan (ATP), across different insurers. While discussing the Ulip plan with your insurer, know whether the plan offers it. This feature may be added right at the commencement of the policy or can be added later on. Many insurers allow opting for this feature by logging in to one’s account online.
2. Target Asset Allocation Strategy
Several studies done in the past have shown that asset allocation plays an important role in determining the final return of an investor’s portfolio. Therefore, it’s important to allocate your premium between funds as per your risk appetite and the goal horizon. Many Ulips offer this feature of the Target Asset Allocation Strategy, wherein the policyholder will have to give the mandate to allocate one’s premium in a fixed proportion between equity and debt to be maintained throughout the policy term. Once allocated, you can then maintain the allocation with quarterly re-balancing. The rebalancing of units is generally done on the last day of each policy quarter. As a policyholder, one can avail of this option at the inception of the policy or at any time later during the policy term.
3. Life Cycle based Portfolio Strategy
The Life Cycle based Portfolio Strategy is a strategy to create an ideal balance between equity and debt, based on one’s age. Under this, as one ages, the allocation in equity funds automatically keeps coming down while allocation in less volatile debt funds keeps increasing. Those who are not sure about the right asset allocation across funds may opt to choose this strategy.
4. Trigger Portfolio Strategy
The Trigger Portfolio Strategy is one feature wherein the Ulip policyholder can take advantage of substantial market swings and invests on the principle of “Buy low and Sell high”. The Trigger Portfolio Strategy enables you to take advantage of substantial equity market swings and invest on the principle of “buy low, sell high”. Under this strategy, the premium will initially be distributed between two funds - equity oriented fund and Income Fund - a debt-oriented fund in a certain proportion, say, 75%: 25%. And then, as and when the fund allocation gets altered due to market movements, the insurer will re-balance the funds in the portfolio based on a pre-defined trigger event. Illustratively, a 10 percent upward or downward movement in the NAV of the equity since its previous rebalancing, will trigger the change in allocation.Unit linked child insurance plansThere are specific Ulips for children’s needs that come with WOP benefits. Unlike any other insurance plan, a child plan is unique because it continues even after the death of the insured. This is possible because child plans have a feature called ‘waiver of premium’ (WOP). If you are buying life insurance plan for the purpose of children needs, ensure that it has ‘waiver of premium’ feature. On the death of the policyholder, the insurer pays the sum assured immediately to the nominee or the family. But, the plan doesn’t end. The insurer keeps the plan active by putting in the premiums through the term of the policy. This money keeps growing and is given to the nominee on maturity. This ensures child/nominee gets the required funds at the right age of the child. In most child plans, WOP is an inbuilt feature while in others it can be added as a rider at an additional cost.
Conclusion
One single Ulip can serve the need at different life stages of an individual. Before buying Ulip ensure you link it to a goal that is at least ten years away. As the majority of charges are spread over the initial five years, keep the term of the plan as long as possible and not just ten or 15 years. Charges in later years are less and there are no surrender charges for exit in later years. Choose plans that give you the option to keep the term longer. It’s important that you don’t buy Ulips merely for the sake of tax savings or as a high-return investment. Save through Ulips only when one lacks the financial discipline to keep protection and savings separate. Having bought for the wrong reason may be expensive if any early exit is sought. Spending a few minutes with the insurance agent understanding the cost-benefit after a need-based discussion would minimize the risk of turning it into a bad investment.Opinions expressed in the articles are of the authors and do not necessarily reflect those of editors or publishers. While the editors do their utmost to verify the information published, they do not accept responsibility for its accuracy. Please consult with your financial advisor before investing.
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