ULIPs- Systematic Insurance cum Investment Plan

Any individual who has purchased a life insurance policy in the last year or so surely would have a
Unit Linked Insurance Plan (ULIP). ULIPs have been selling like Wonder Products in the recent past
and they are likely to continue to outsell their plain vanilla counterparts going ahead.

A ULIP is a market-linked insurance plan. The difference between a ULIP and other insurance plans
is the way in which the premium money is invested. Premium from, say, an endowment plan, is
invested primarily in risk-free instruments like government securities (gsecs) and AAA rated
corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate
bonds and gsecs. So what else apart from this reason makes ULIPs so attractive to the individual?
Here, we have explored some reasons, which have made ULIPs so irresistible.

Transparency
However, ULIPs offer a transparent option for customers to plan their various life stage needs
through market-led investments as compared to traditional investment plans.

Insurance cover plus savings

ULIPs serve the purpose of providing life insurance combined with savings at market-linked returns.
To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an individual the twin
benefits of life insurance plus savings. This is unlike comparable instruments like a mutual fund for
instance, which does not offer a life cover.

Multiple investment options

ULIPs offer variety than traditional life insurance plans. So there are multiple options at the
individual's disposal. ULIPs generally come in three broad variants:

• Aggressive ULIPs (which invest 80%-100% in equities, balance in debt)

• Balanced ULIPs (invest around 40%-60% in equities)
• Conservative ULIPs (invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity allocations may
vary across insurance companies. A ULIP policyholder has the option to invest in a variety of funds,
depending on his risk profile. If one does not have the appetite to invest in equity, they can choose
a debt or balanced fund.

Flexibility
Individuals can switch between the ULIP variants outlined above to capitalise on investment
opportunities across the equity and debt markets. Some insurance companies allow a certain
number of free' switches. This is an important feature that allows the informed individual/investor to
benefit from the vagaries of stock/debt markets. For instance, when stock markets were on the
brink of 7,000 points (Sensex), the informed investor could have shifted his assets from an
Aggressive ULIP to a low-risk Conservative ULIP.

Switching also helps individuals on another front. They can shift from an Aggressive to a Balanced
or a Conservative ULIP as they approach retirement. This is a reflection of the change in their risk
appetite, as they grow older.

Works like a SIP

Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have probably
already heard of the Systematic Investment Plan (SIP), which is increasingly being advocated by
the mutual fund industry. With an SIP, individuals invest their monies regularly over time intervals
of a month/quarter and don't have to worry about `timing' the stock markets. These are not
benefits peculiar to mutual funds. Not many realise that ULIPs also tend to do the same, albeit on a
quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP works on the
rupee cost-averaging principle. An added benefit with ULIPs is that individuals can also invest a
one-time amount in the ULIP either to benefit from opportunities in the stock markets or if they
have an investible surplus in a particular year that they wish to put aside for the future. When
you're buying a ULIP, make sure you select one that works well for you. The important thing is to
look for and understand the nuances, which can considerably alter the way the product works for
you. Take the following into consideration:

Charges : Understand all the charges levied on the product over its tenure, not just the initial
charges. A complete charge structure would include the initial charges, the fixed administrative
charges, the fund management charges, mortality charges and spreads, and that too, not only in
the first year but also through the term of the policy.

Fund Options and Management : Understand the various fund options available to you and the
fund management philosophy and objectives of each of them. Examine the track record of the funds
and how they are performing in comparison to benchmarks. Who manages the funds and what
experience do they have? Are there adequate controls? Importantly, look at how easily you can
access information about your fund's performance when you need it -- are their daily NAVs? Is the
portfolio disclosed regularly?

Features : Most ULIPs are rich in features such as allowing one to top-up or switch between funds,
increase or decrease the protection level, or premium holidays. Carefully understand the conditions
and charges associated with each of these. For instance, is there a minimum amount that must be
switched? Is there a charge on the same? Must you go through medical underwriting if you want to
increase the sum assured?

Company : Last but not least, insure with a brand you can trust to honour its commitment and
service you according to your requirements

First and foremost, investors need to understand that a ULIP is a bundled product of their
investments and their insurance proceeds. Since privatization in 2000 and the introduction of ULIPs
as a life insurance product category, the overall insurance penetration in the country has grown
from around 2% to 4%. Today, more than 70 per cent of the new business premium for life insurers
comes from Ulips.

All Ulips have several funds in which your money can be put to work, much like a mutual fund.
Assuming that you choose the growth or the equity plan, ask for the NAV performance for the last
two years at least. Choose three with the highest performance track record vis-a-vis the
benchmark. Now choose the best performing policy in terms of returns with the lowest cost.

ULIP vs Mutual funds

By concept, there is only a small difference between ULIP schemes and a
Mutual fund scheme, in terms of product structure, excluding risk
coverage. They are both market linked for returns, and they will both carry
market risk. Based on the investor’s selected stock performance, his
returns will reflect exactly that in both cases. For both options, a fund
manager will be responsible for running the scheme. That is all as far as
the similarities are concerned, i.e. the product structure. There are
significant variations in the way the two products are managed, and, on
an important note, regulated.
Differences
Regarding regulation, Mutual Funds are regulated by the SEBI, while
ULIPs are regulated by the IRDA. From an industrial point of view, while
Mutual Funds focus on low costs and better performance as the USP,
ULIP looks more at distribution reach as the USP.
Generally, agents who ‘distribute the numerous AMC products’ are the
ones that sell Mutual Funds, whereas the agents who are attached to a
single insurance company are the ones that sell Insurance (excluding
insurance brokers who are much fewer than attached agents). This is a
very important consideration, as there’s a tendency for tied agents to be
well acquainted, and champion only the products that his principal
insurance company sells, whereas a Mutual Fund agent, who is mostly
unattached, will be more performance driven when selecting a fund, given
his fees are wholly dependent on investor satisfaction.
Mutual Funds have very stringent transparency requirements compared to
ULIPs, but this also ensures that the investor is availed as
much information as necessary, unlike with ULIPs. Things like Portfolio
disclosure and Daily NAV are better followed with Mutual Funds.

In terms of flexibility, a ULIP will allow you to increase your life cover while
keeping your premium the same. This is achieved by reducing your
investment allocation. However, if you have a term policy purchased on top
of a Mutual Fund, you cannot increase your life cover. You would only
have the option of purchasing a new policy, thus incurring new
administration costs again.

In terms of costs of insurance, typically investing in a Mutual Fund will cost

you less than it will cost for a general ULIP scheme. But in a nutshell, ULIP
products are better suited for long term investment bundled with insurance
cover, whereas Mutual Funds are better suited for those that solely focus
on investment and medium-term returns.
Summary:
Mutual Funds are regulated by the SEBI, while ULIPs are regulated by the
IRDA.
Mutual Funds are sold by un-tied agents, while ULIPs are sold by tied
agents attached to one particular insurer.
Mutual funds have stricter transparency requirements than ULIPs.
ULIPs are more flexible than MFs, as they allow you to increase your life
cover while the premium remains the same; unlike ULIPs, where you have
to buy a new policy altogether.

MFs

Primary objective investment

Cost even costs through the term

Investment duration: works out for medium term, long-term investor. Risky for short term
Investors.
Flexibility: very flexible. Plenty of scope to correct your mistake if you made any wrong
Investment decision. You can easily shuffle your portfolio in MFs.
Liquidity: very liquidity. You can sell your MFs units any time (except ELSS or specified
Lock in period scheme)

Investment objective: MFs can be used as your vehicle for investment to achieve different
objectives. (E.g. buying a car three years from now, down payment for a home five years from
now. Children’s marriage 15 years from now. Retirement planning 25 years from now.
Tax implication: all investment in MFs does not qualify for section 80c. Only investment in
ELSS qualifies for section 80c. MFs returns on equity MFs are exempt from long-term capital
gains tax. Unless tax laws change in the future.
Strings attached: nothing too substantial. At most pay a small exit load if any.

ULIP:

Primary objective: Protection + investment

Costs: upfront costs over the first few years – high, but over the policy term, ULIPs are
comparing better.
Investment duration: work out only for long-term investor.
Flexibility: flexibility is limited to moving across the different funds offered with your policy.
Correcting mistakes can turn out to be expensive. Moving funds from ULIP of a different fund
house can be expensive.
Liquidity: limited liquidity. Need to stay invested for the minimum number of years specified
before you can redeem.
Investment objective: ULIPs can ideally be used for achieving only long term goals (children’s
marriage, education, retirement planning) as the charges are usually higher in the initial years
and it is more of a longer term product.
Tax implication: ULIPs provides tax benefit under section 80c. We are moving from EEE to
EET. No clarity if ULIPs will be taxed under EET.
Strings attached; some strings attached for your policy to be in effect. Minimum number of
premiums needs to be paid.