<p><em>Ulips can be your one investment for all long-term needs. Invest right and reap benefits throughout your life<br><br><strong>By Sunil Dhawan</strong></em><br><br>Indians have always been spoilt for choice when it comes to investing. From bank fixed deposits, post office savings products to mutual funds and exchange traded funds, there are investment products for every need, horizon and risk appetite. Among the myriad options that investors have, unit linked insurance plan (Ulip) is one. Typically, a combination of protection and savings, Ulip has been in the market for almost 15 years with sales languishing since 2009. That may, however, change soon as the largest life insurer in the country Life Insurance Corporation of India (LIC) is to go the Ulip way shortly (after new guidelines). And with market conditions improving, Ulips can take centre stage once again.<br><br>Ulip can help meet all long-term goals through a single purchase. But before we tell you how, let’s look at the evolution of Ulip over the years.<br> <br><strong>Back In The Day</strong><br>When first launched in 2001 after the Indian insurance sector was opened to FDI, Ulips saw a quick acceptance. These market-linked products had the attraction of returns commensurate with stock market performance. Agents sold Ulips as pure investment products, and people bought with the hope of making a quick buck from stock returns. With a little push and lots of mis-selling, Ulips soon became a pull-product. A lot of information about the structure and working of Ulips was withheld from buyers and by the time they realised that returns don’t come easy in Ulips, the damage was done.<br><br>Ulip is a complex hybrid investment product wherein several factors such as premium, duration of the plan, mortality, fund administration charges and allocation charges to name a few are interrelated and impact each other. In its earlier avatar, Ulips had a lock-in period of three years with the potential of market-returns making it most attractive. Buyers lapped up Ulips as LIC only sold traditional plans such as endowment and money back with longer lock-ins and no exposure to equity asset class. The insurance industry grew over 25 per cent CAGR, the markets soared to new heights, and no-one complained.<br><br>The story derailed when markets came crashing down and never recovered to earlier levels. Those who bought Ulips with a 3-year horizon became the biggest casualty.<br> <br><strong>Ulips Today</strong><br>In 2010, insurance regulator came out with a set of guidelines for Ulips. Lock-in period was increased to five years and charges were capped. The idea was to make Ulip a long-term investment product. Companies became more vigilant with cases of mis-selling and introduced various measures to ensure people bought Ulip for their long-term needs. The Insurance Regulatory and Development Authority of India capped overall charges at 3 per cent of net yield (return on maturity minus charges) for Ulips with a tenure of 10 years or less. In case of insurance policies of over 10 years, total charges were capped at 2.25 per cent, of which the fund management charges can not exceed 1.35 per cent. The mortality charges were outside the caps.<br> </p><table align="center" border="1" cellpadding="1" cellspacing="1" style="width: 600px;"><tbody><tr><td style="text-align: center;"><span style="color:#ff0000;"><strong>WHAT SHOULD YOU KNOW WHEN INVESTING IN ULIPS</strong></span></td></tr><tr><td><ul><li>Identify various goals at different life stages. Ask your preferred insurer to conduct Need Analysis</li><li>Estimate requirement for each goal duration-wise and after adjusting for inflation</li><li>Ask insurer to generate ‘Illustration Benefit’ specific to your details of age, term, etc.</li><li>Incorporate top-up premiums within Illustration Benefit</li><li>See if goals are being met at each life stage as per need</li><li>Else, modify premium or sum assured as per one’s affordability</li><li>Make partial withdrawals from fund as per need at specific life stage</li></ul></td></tr></tbody></table><p><br>Capping charges has made Ulip competitive, especially in the long-term category among peer products. For the distributor community, Ulips are easier to sell compared to traditional products.<br><br><strong>Who Is Ulips For</strong><br>For those who lack financial discipline and are unable to manage protection and savings separately, Ulip is just the product. Investors who are in a position to identify the right mutual fund schemes for their needs and simultaneously get a protection through a pure term insurance plan can, however, avoid Ulips. Ulip because of its lock-ins and longer horizon instils investing habit in investors.<br><br><strong>Ulips For Lifetime</strong><br>It is possible to meet all long-term goals such as a new house, children’s education , marriage and even retirement through a single Ulip. Niraj Shah, director – Marketing, Strategy & Products, PNB MetLife, says, “A single Ulip can be used to meet multiple savings goals using features such partial withdrawals, multiple fund options, premium payment and policy term options. Ulips can be effectively used for wealth creation, retirement or child education depending on your financial goals.” It is important to remember that generating maximum return is not the objective. The returns from equity funds in Ulips are largely in line with the market, do not expect them to beat market by a wide margin. <br> </p><table align="center" border="1" cellpadding="1" cellspacing="1" style="width: 500px;"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/long-term-bets-lrg.jpg"></td></tr></tbody></table><p><br><strong>Plan Life With A Ulip</strong><br>Identify the long-term needs and estimate the requirement after adjusting for inflation. Shah says, “Using a human life value calculator, one can easily determine how much should be an ideal sum assured.” Ask your insurer for an ‘Illustration benefit’ based on your age, term and sum assured for the various goals at different life stages. The illustration also helps in determining the premium needs so the fund value at each stage meets your requirement. Aalok Bhan, director and head - Product Solutions Management, MAX Life Insurance, says: “For base level of protection one should use term plans while for specific life stage needs one should aggregate the requirement and buy protection to that extent.” <br><br>Choose an Ulip with a longer term to meet the goals at various life stages. Under the new guidelines, one has to continue paying the premiums till the end of the term i.e., till maturity. Earlier, Ulips allowed premiums to be paid till three years or for a limited period of five years.<br><br><strong>Premium & Top Ups</strong><br>Opt for the monthly plan through the SIP mode. Monthly investments help in averaging the buying cost of units and inculcating a habit of investing. Use the top-up option in Ulips to park in any additional investible surplus available. Top-ups can come in handy in not only reducing the overall cost of Ulip for policyholders but also in increasing the life cover with every top up. Top-ups are usually charged at 1- 2 per cent, hence averages your cost. Buying a new Ulip could cost you much more.<br> </p><table align="center" border="1" cellpadding="1" cellspacing="1" style="width: 500px;"><tbody><tr><td style="text-align: center;"><span style="color:#ff0000;"><strong>WHEN TO OPT FOR</strong></span></td></tr><tr><td><strong>1. </strong>Choose to invest in Ulips only if keeping protection and savings separate is not easily manageable<br><strong>2. </strong>A combination of term plan and mutual funds could work if there is financial discipline and the wherewithal to identify right schemes and plan<br><strong>3.</strong> Use Ulips to meet only those goals that are at least 10 years away<br><strong>4.</strong> Premiums need to be paid every year till maturity hence ensure paying comfort before investing<br><strong>5. </strong>Opt for diversified equity fund and avoid timing the market and switching too much ULIPS</td></tr></tbody></table><p><br><strong>Fund Options</strong><br>In most Ulips, there are 5-9 fund options with varying asset allocations between equity and debt. Further, in equity funds, there could be large-caps and mid-cap stocks. A few have multi-caps and thematic exposure too. Under debt, the range could be from liquid to short term and long term. Switching between fund options, irrespective of the holding period, is exempt from tax. Considering the long-term nature of goals, there is no need to time the market. Investors can avoid any temptation to switch between funds every time the market moves 500 points up or down.<br><br>For goals that are at least ten years away, opt for large-cap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. Stick to diversified funds in Ulips and avoid thematic funds.<br><br>Once the lock-in period ends after five years, Ulips allow tax-free partial withdrawals. So whenever a goal is near, one can withdraw from the fund to meet the need. It is suggested to de-risk funds, i.e., move from equity to debt at least three years before the goal.<br><br><strong>Conclusion</strong><br>Every time a Ulip is bought, there is an administrative cost involved which can be avoided if all investments are within a single Ulip. The in-built flexibility, transparency makes it an apt investment product for long-term goals provided it is bought the right way. As Shah puts it aptly, “Ulips mirror our life stage and savings goals.” <br><br>sunil@businessworld.in<br><br>(This story was published in BW | Businessworld Issue Dated 24-08-2015)</p>