ULIPs in a new avatar

The ease of use and cost-effectiveness make these ULIPs a good investment tool

ULIPs are a good investment tool for customers who want to invest in the equity market in a systematic and disciplined manner over a long term. The new-age ULIPs, an upgraded version of their earlier avatars, are also cost-effective.

Cost structure

Regulators and the life insurance industry have helped ULIPs evolve to provide more value and benefits to customers. For customers, the most critical interventions have been on the charges front.

Not only have the maximum charges on ULIPs on a year-on-year basis been capped, the combined charges cannot be more than 2.25 per cent a year for a policy term of over 10 years. Today, several life insurance companies also have low allocation charges or have done away with them in the new-age ULIPs.

Customers also see to it that fund management charges do not exceed 1.35 per cent. In fact, several ULIPs have much lower charges — some of the equity-oriented ULIPs charge 1.25 per cent, several debt-oriented ULIPs charge as low as 0.95 per cent.

Even the surrender charges have been modified. If a customer decides to surrender the ULIPs, no charges will be deducted, provided the policy has completed five years.

If it is below five years, the fund value of the customer will be transferred to a specified debt fund after the surrender charges are deducted. The money will be paid to the customer once the mandatory five-year lock-in period of the policy ceases.

Going online

The emergence of online ULIPs and their gaining popularity, is a sign of things to come. To enhance their buying experience, life insurers offer a host of simple-to-use online calculators to help customers understand their investment needs. Also, with just a few clicks, customers can view the benefit illustration and more. The simplified process and lower costs compared to their counterparts, are driving more customers to the new-age ULIPs; not to forget the already existing benefits.

Lock-in periods

ULIPs come with a mandatory lock-in period of five years. Customers can pay premiums on monthly, quarterly, half-yearly or annual basis. This helps in two ways.

One, it brings in financial discipline. Two, it helps the customer take advantage of the long-term market movement. The lock-in period also provides better fund performance.

Good fund performance

The track record of ULIPs is testimony to the strong products they offer. The average category return of large-cap equity ULIPs has been close to 15 per cent CAGR; mid/small-cap ULIPs have delivered average category returns of around 24 per cent CAGR, as of April 2018 (Source: Morningstar).

The performance of ULIPs is actually comparable, if not better, than similar investment products.

Typically, this does not come to the notice of customers, as benefit illustrations project returns of 4 per cent and 8 per cent, as mandated by the IRDAI.

Several independent agencies publish this data and customers can check their fund performance and returns on a regular basis on these sites or by logging on to the sites of the companies they have invested in.

Tax advantages

When customers invest in ULIPs, they also get the advantage of rebalancing their portfolio. This means a customer can switch between equity and debt funds easily without any tax liability (no exit load applicable).

ULIPs always enjoyed tax benefits under Section 10 (10D) and Section 80C. However, with this year’s Budget introducing long-term capital gains tax on equity investments through MFs, ULIPs have become more attractive.

Lastly, the most important aspect of ULIP as an investment tool is that it comes with a life cover. Thereby, it not only enables you to achieve your goals, but also offers protection to your family in case of untoward incidents.

The writer is MD & CEO, Bajaj Allianz Life Insurance

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