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  • 16 MAY. 2018

    Five must-dos before investing in ULIPs

    Unit linked insurance plans (ULIPs) have been in the news of late. Earlier, ULIPs were perceived as a high cost and low return investment option and customers were weary of investing into this instrument. However, the advent of digital technology has made the product more cost effective, leading to emergence of new generation ULIPs and a turnaround in the category.

    The steady and sustained growth in the category is a testament to this. Private insurers’ new business premium acquired through the category clocked 38% CAGR in the last five years. This clearly indicates that ULIPs are a lucrative proposition for today’s customers and is slowly becoming a pull product.

    The digital wave has triggered a change in the industry, facilitating and increasing a direct engagement between customers and insurers. Equipped with the ability to gain customer insights at a quicker pace, insurers are now able to push the envelope of product innovation.
    Online distribution has restored faith in the category by significantly minimising acquisition and maintenance costs. ULIPs are expected to maintain the uptrend, with more and more insurers innovating and finding the best investment proposition for their customers.

    So, should you include a ULIP in your financial portfolio?

    The answer is Yes! Customers should purchase the low-cost new age ULIPs, which offers several fund options to suit your risk appetite and allows for flexibility in switching funds several times without any cost. This flexibility allows investors to benefit from market upturns and escape market downturns, thus facilitating steady wealth appreciation. The mandatory lock-in period of five years promotes financial discipline as well as provides scope for higher returns.

    These features have in fact led to a better and consistent investment performance in ULIPs over the last five years. Median largecap category performance on a five-year basis stands at 16.5%. After accounting for long-term capital gains tax going forward, ULIP returns will get a further boost.

    Like any other financial product, buying a ULIP requires thorough research before making the final purchase. Here is a quick guide for those considering buying a ULIP plan:

    a) Define your goals

    ULIPs are ideal for long-term wealth creation, securing your child’s future or planning your retirement. It is important that you define what goals you wish to achieve through this investment to avoid any future disappointment.

    b) Know your risk appetite

    Your risk appetite will determine your asset allocation. If you are risk averse and do not want to invest in volatile assets, allocate more funds towards debt. Similarly, if you are not apprehensive of market volatilities, you may assign more funds towards equities.

    c) Re-balancing your allocation

    Some products offer an option to automatic rebalance asset allocation as you grow older. As the age increases and policy nears maturity, the plan shifts asset allocation from riskier assets to conservative ones. Typically, one’s risk appetite decreases with age and such a benefit might be crucial.

    d) Investment timeframe

    Knowing your risk appetite is not enough, you must also decide how much money you are willing to pour into this instrument. This will enable you to decide your investment timeframe.

    e) Compare

    Make a thoughtful decision. Compare all products available in the market on parameters like terms of the policy, benefits and limitations. A low-cost structure should not be the only criteria for opting for a product. Assess why the cost is lower and what benefits you are deriving from the product. Look carefully into the fund management practice of the company and how consistent have their returns been historically. Check the performance of all funds, not just one.

    Since ULIPs offer the convenience of both wealth creation and protection, it is an ideal long-term financial instrument. In fact, in light of the LTCG tax now, ULIP gets an edge!

    PS: Original Article was published at Money Control. Follow the link for the article.