Buying A ULIP? Make Sure You Check These

ULIP's (Unit Linked Insurance Plans) are a classic example of a well-intended financial product that didn't quite live up to its potential. Despite the first ULIP being launched by UTI in 1971, the share of ULIP's in total life insurance premium mobilized in the year 2014-15 was a mere 12.68 per cent (according to the IRDA annual report), albeit marginally up from 11.95 per cent in the previous year.

The thought process behind launching ULIP's as a product was simple - provide clients with the opportunity to park their life insurance premiums in a more transparent manner, and offer them a chance to participate in the superior growth offered by the capital markets. Unfortunately, things didn't quite turn out as planned, at least at the beginning.

From 2005 onwards, buoyed by the growth in stocks, private players launched a slew of ULIP's. Unfortunately, many of these ULIP's carried extremely high front end costs which were essentially paid out as commissions (often as high as 70 per cent of the first year premium, in some cases) and rampant misselling ensued, leading to a fundamental loss of faith in ULIP's as a product over the five or so years that followed.

Insurance companies justified high costs stating that the high initial costs would essentially be amortized over the premium payment term, which should ideally have amounted to twenty years or more. However, this logic was flawed as it didn't take time value of money into account.

However, in 2009, IRDA passed regulations that capped the maximum fund management expenses as well as front end loads that could be applied to a ULIP, thereby making these products a lot more investor friendly.

"It has been more than a decade that ULIPs have been introduced in the market it has been a learning curve for Insurers & regulators. Lessons learned by insurers, competition & regulators have made ULIP's more and more investor friendly with time", says Manoranjan Sahoo, Chief Agency Officer at Reliance Nippon Life.

If you've decided to invest your money into a ULIP, make sure you check these points before you sign off.

Charges
Look for a ULIP with a low premium allocation charge. The premium allocation charge is essentially the brokerage being paid to your agent. A high allocation charge will start you off on the back foot, as the percentage allocation to your investment pool will drop in tandem. Any ULIP with an allocation charge exceeding 5 per cent should be avoided. There are a number of ULIP's nowadays which do not levy an allocation charge if the annual premium exceeds a given threshold - for instance, 2 Lacs in the case of Bajaj Allianz Future Gain. HDFC Click2Invest doesn't levy any allocation charges at all!

Other costs include policy administration charges (ranging from a few hundred to a few thousand), fund management charges (which usually range from 0.50 per cent to 1.50 per cent per annum), and mortality costs.

"In 2010, IRDAI had put in strict guidelines where Fund Management Charges (FMC) were restricted to an upper limit of 1.35 per cent", says Sahoo.

Past Performance
A number of ULIP funds have actually done quite well over the past five years. For instance- ICICI Pru Life-Multi Cap Growth has delivered annualized returns of close to 13 per cent over the past five years, nearly at par with the popular large cap equity mutual fund ICICI Prudential Focused Bluechip. Ditto for Reliance Life Pure Equity Fund 1, which has performed more or less at par with its Mutual Fund counterpart - Reliance Top 200 Fund. Before you buy a ULIP, it's worthwhile to check back for past returns on a popular and credible portal such as Morningstar.

Associated Sum Assured
Lest you forget - the main purpose of buying a Life Insurance policy is to up your life cover and create a cushion for your family to be indemnified against the loss of income arising from the potential loss of your life. If you aren't receiving a fairly high death benefit from your ULIP, you may be better off combining a simple term insurance plan with mutual funds instead. IRDA has currently mandated a sum assured of least 10X your annual premium (7X if you're above 45). That's a Rs. 10 Lac sum assured for an annual premium of Rs. 1 lakh, which is woefully low. Ironically, upping your sum assured may lead to your mortality costs (refer the paragraph on charges) shooting through the roof and impacting your fund growth. You need to figure out, through permutations and combinations, if your ULIP even allows you to strike an optimal balance between your sum assured and your portfolio growth.

"The regulator has standardized the equation for the customer so that there is an ideal balance of savings and protection in a unit linked products. In the product guidelines of 2010 for ULIPs, IRDAI had specified the minimum protection cover to be offered to the customer based on the Age at Entry, Annual Premium and the Policy Term chosen", says Sahoo.

Asset Allocation & Switching Costs
The asset allocation you choose to start off with will largely determine your long term return. If you've young and have a long term investment horizon, go for a larger allocation to the equity fund and a lower allocation to debt. If your risk tolerance is lower, you may need to opt for a higher allocation to debt. An annual rebalancing via switches may be required, in order to bring your asset allocation back to your target percentages. Some ULIP's allow free switches, whereas still others allow a pre-fixed number of cost free switches every year - typically ranging from five to ten. Don't turn a blind eye to your asset allocation while investing in a ULIP.