ULIP: Twin benefits of Insurance and Investment

A Unit Linked Insurance Plan, popularly called ULIP, is a financial product that offers the twin benefits of life insurance as well as an investment. Part of the premium paid goes towards the sum assured (amount one gets in a life insurance policy) and the balance gets invested in the investments one desires, be it equity, debt or a mixture of both. Thus, ULIP is life insurance solution that provides the benefits of protection and flexibility in investment.

In case of a ULIP, the policy value at any time varies according to the value of the underlying assets at the time. In traditional insurance products, the sum assured is the corner stone whereas in ULIP, premium payments are the key component.

ULIPs are akin to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same.

The popularity of ULIPs can be attributed to their transparency and flexibility they offer. With passage of time, these plans have been successfully mapped along with life insurance need to retirement planning. Investors have the choice of enhancing their insurance cover, modifying premium payments and even opting for a distinct asset allocation than the one they originally opted for.

In the past few years, insurance companies have carpet–bombed the market with ULIPs. Powered by the presence of a large number of variants, ULIPs offer investors the opportunity to pick a product which matches their risk profile.

An individual with a high risk appetite can shun conventional endowment plans (which invest about 85% of their funds in the debt instruments) and can go in for a ULIP which invests its entire corpus in equities.

The caveat to be considered in case of ULIPs is that the high charges in the initial years eat into your returns. In some cases the charges are as high as 25-30% of the premium paid. That means that if you are paying Rs 1000 as premium, only Rs 700-750 goes into the investment corpus for the first two or three years, making it a very costly structure.