Insurance & Investment With Unit Linked Insurance Plans (ULIPs)

The primary objective of insurance is to provide protection from any kind of peril. Life Insurance, as the words suggests, is getting financial protection for the near and dear ones in case the insured dies prematurely. Therefore to address this need, term insurance should suffice. The dilemma for a person is not only ‘the risk of living too short’ but also ‘the risk of living too long’. Thus one has to plan for the future too. Hence there is a need for savings and investments.

In financial diction, ‘Investment’ is the purchase of assets which will generate income or appreciate in value in the future. In an economic sense, an ‘Investment’ is the purchase of goods that are not consumed today but are used in the future to create wealth.

Investment and speculation

There is a difference between ‘making an investment’ and ‘speculation’. Investing usually involves the creation of wealth whereas speculating is often a zero-sum game; wealth is not created. Although speculators are often making informed decisions, speculation cannot be categorized as traditional investing. For instance, many people think of ‘investing in real estate’ and then selling the asset in a year or two to make hefty profits.

Now this may sound like an investment; but it is in fact speculation. The prices may or may not increase in the near future.

Traditional modes of investment

Investment in Gold

Gold, like equities, is traded on a daily basis and is volatile. It has high liquidity and can be sold easily. In the short run, one may earn on lose money. However in the long run, gold too can give good returns. Looking at gold’s price history, the precious metal increased from Rs.4334 per 10 grams in 2002 to Rs.31799 per 10 grams in 2012. In India, gold comes with an emotional value and parting away with it is somewhat undesirable.

Investment in risk free instruments

The returns one gets on options like fixed deposit, PPF, KVP, NSC, bonds and POSS (Post Office Savings Scheme) are not governed by market risks. Over the years, risk averse investors have preferred to invest in these instruments as the risk is null and the sum received on maturity (or monthly pay-out in case of POSS) is assured.

With the increased exemption limit of 1.5 lakhs in PPF post Union Budget 2014, parking money in PPF for the long term has become more attractive.

Investment in low and high risk instruments

This category of investment caters to investors who have a certain amount of risk appetite and want their investments to reap better returns.

Low risk Debt funds, NCDs (Non-convertible debentures)

High Risk Equity funds, ELSS, pure equity

Associating insurance with investment

Many insurers offer insurance investment products as there is a need for a single product offering insurance on one hand and good returns on the other. As a ground rule, all investments should be goal oriented. This means that the money is available when the need arises. Systematic long term investments will yield good dividends.

ULIPs are an ideal tool for people seeking protection and investment in one product. Like mutual funds, the money collected is invested in various funds which are managed by highly qualified fund managers. The mortality charges in ULIPs are based on “Sum at Risk” basis. As regular contributions are made in terms of premium, the funds in the individuals’ portfolio will increase. With that, the risk to the company will be sum assured minus the fund value. Once the fund value exceeds the sum assured, no mortality charges are levied.

ULIPs can be an ideal investment tool as it offers the following key benefits: –

• Flexible Solution that can be tailored to your needs. The customer can choose a policy tenure ranging from 10 to 30 years. Frequency of premium payment is also available i.e. you can choose to pay the premium on a monthly, quarterly, semi-annual or annual basis.
  1. Sum assured can be chosen based on one’s protection need.
  2. There are a variety of funds to choose from. It will depend on the risk appetite of the person.
• Top-Up facility to enhance your investments resulting in higher accumulated fund value.
• Access to your wealth any time you require, through facilities like loans and partial withdrawals.
• Choose to pay premiums for limited period yet enjoy the wealth accumulation and insurance protection over a longer policy term.

So why is it viable?

At the start of an individual’s earning cycle, personal wealth is low and insurance cover is required to protect the family’s financial needs. With the passage of time, investments will grow thus reducing the protection needs proportionately. And with diligent regulation of the investment part of a ULIP, the insured can very well achieve having surplus funds in life’s later years. For that, long term investment in ULIPs will help to get the desired result.

In a proverbial sense, investing in ULIPs is like feeding two birds with one hand.