1. Why does an uncertain market outlook warrant a ULIP?

In a dynamic and volatile market, turn the market’s tide in your favour through ULIPs.

The current market meltdown has taken its toll on investors. Moreover, an uncertain political and economic scenario does not paint a very rosy picture for the near future too. With a hazy road ahead, the ideal avenue for building long term wealth is Unit Linked Insurance Plans (ULIPs).

Why ULIPs?

Although ULIPs too are market linked, the very fact that they combine a life insurance cover with investment gives it an edge over other equity based products. Further, ULIPs carry several other advantages which help them score over the popularity charts, irrespective of the prevailing market scenario, such as:

1. Long-term wealth creation: ULIPs are predominantly long term protection and saving instruments and hence, they are able to weather short term market volatilities and create wealth over the long term. Moreover, ULIPs provide various investment options to choose from, helping an investor structure his asset allocation based on his risk profile and financial goals.
   
   

2. Capital guarantee feature: Here, ULIPs offer a guaranteed maturity value to policyholders, irrespective of market vagaries. With key market indices having slumped drastically this year, these capital guarantee products come to investors’ rescue in turbulent times.

3. Flexibility: Switching between investment funds to suit changing investor requirements is one of the most important features of ULIPs. In volatile situations, with ULIPs, you can switch from an aggressive plan to a more conservative plan, thus limiting portfolio risk.

4. Tax benefits: Investment in ULIPs comes with the Section 80 C tax break.

5. Disciplined approach: ULIPs which require regular premium payment work, allow you to capture market volatility to your advantage.
6. Exposure to money market: A recent move by the Insurance Regulatory and Development Authority (IRDA) has allowed insurers to invest up to 40 per cent (from the earlier 20 per cent) of a policyholder’s funds in money market instruments in the short term to play against downside risk in equity.

India has a well developed capital market and short term market blips cannot do much harm to ULIPs. The trick is to stay invested with a long term objective. In fact, even when the markets face a downturn, ULIPs, due to all their combined benefits, make for an ideal ‘wealth creation and life protection’ solution.

Source: FinanceInsights

2. What is the impact of inflation on investment return?

While calculating your investment returns, it is important to take into account inflation in order to get the ‘real’ picture on returns.

If an investment generates an annual return of 10 per cent, then what have you earned from that investment? “Obviously 10 per cent”, is what most of you may retort. Right? Wrong! In order to get the true picture of returns, what you need to know is the ‘real return’ your investment has fetched. Your next question will be – “What are real returns?”

The ‘reality’ of returns

Simply put, ‘real’ returns are the returns we earn after adjusting for inflation, assuming the gains do not attract any tax. So, for instance, if you have invested Rs 10,000 and expect a yield of 10 per cent per annum and inflation is at 10 per cent, the real return that you earned is actually zero!

Why consider inflation for return calculation?

Inflation is nothing but a rise in the prices of goods and services. Inflation not only affects your purchasing power but also erodes the value of money. For instance, let’s assume that you can purchase 50 kilos of sugar for Rs 1,000 today. However, considering an annual inflation rate of 11 per cent in the prices of sugar, a year later you will be able to buy only 45 kilos of sugar for Rs 1,000. Let us further assume that Rs 1,000 is invested in a bank fixed deposit yielding 8 per cent interest per annum. Hence, a year later, the return on your deposit would be Rs 80. Now, this amount of Rs 1,080 would still fetch only 48.5 kilos of sugar. In other words, inflation has reduced the value of your earnings.

Invest to earn attractive ‘real’ returns

The adverse impact of such inflationary trends can be offset/ minimised by investing in avenues that offer good yields, based on your risk appetite. You can invest in equities and equity based instruments that can earn positive ‘real’ returns. ULIP is one such option that has the potential to generate good returns over a medium to long term. Along with life insurance cover, ULIPs provide tax benefits at the time of investing and on receipts at maturity. A systematic investment plan (SIP) in ULIPs facilitates taking advantage of the inherent benefits such as investment discipline and rupee cost averaging, which contribute in generating good ‘real’ returns.

So, whenever you think about investments, think ‘real’.

Source: FinanceInsights

3. Why to I choose a ULIP?

There are several ULIPs on offer, each boasting of attractive features and benefits. Here’s an assessment methodology you can adopt for selecting the policy that suits your needs the best.

Most of us usually end up investing in ULIPs without giving due consideration to their intricacies and hence, might feel short-changed at a later date. The key is to gather as much information as possible about various products available in the market, and thus take an informed decision. In addition, you must consider the following parameters while putting your money in ULIPs:

1. Charges
   

   Fund charges of Company A
   Premium	1st yr	2nd yr	3rd yr	4th yr
   Total Charges	30.00%	30.00%	30.00%	4.00%
   Total amount invested over 10 years	Rs 1,05,840
   Annual premium: Rs 12,000	Tenure of insurance: 10 yrs

   
   In ULIPs, the premium invested is the amount after deducting annual expenses and the fund management charges for the services rendered by the insurer. Apart from this, there are other costs attached such as premium allocation charges, mortality charges, switching charges etc. which should be taken into account. This means lower the costs, larger is the amount of premium invested, thereby, reaping higher returns…
   
   

   Fund charges of Company B
   Premium	1st yr	2nd yr	3rd yr	4th yr
   Total Charges	26.00%	24.00%	22.00%	15.00%
   Total amount invested over 10 years	Rs 98,760
   Annual premium: Rs 12,000	Tenure of insurance: 10 yrs

   
   The charges levied may be different for each insurance company. It is important to compute the overall impact of these charges on your investment. In the above illustration, though Company B charges a lower amount in the first 3 years, the total amount invested by Company A over a period of 10 yrs is higher than Company B, hence Company A is a better investment option.


2. Risk profile
   Every ULIP offers several investment funds, each bearing a different equity: debt allocation and thus suitable to a particular level of risk appetite. Selection of a ULIP should be made in accordance with your risk profile, i.e. the investment funds on offer. For instance, a person with a propensity to take above-average risk can choose an aggressive fund that invests largely in equities or a growth fund with around 80 per cent allocation to equities. Similarly, it would not make sense for a person with a low risk appetite to choose such high-risk laden options, with debt funds being more appropriate for such categories of investors.
3. Guaranteed maturity value
   In a market-linked product, protecting the investment's downside during market swings can be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee (guaranteed maturity value) and what costs have to be borne for the same.
4. Amount of cover
   Out of the total premium, a certain sum goes towards providing cover. See how much amount goes towards insurance so that you can ascertain the cost of insurance. Also read the conditions given for grant of insurance benefit.
5. Track record of the insurer
   Since ULIPs are long term products, due consideration should be given to the insurer’s reputation and performance over a period of time. You should also assess fund’s performance over a period of time and whether it has yielded steady returns.
6. Riders
   Insurance companies offer several riders for accidental death and disability/ dismemberment, critical illness, hospital cash benefit, income loss, etc. These are additional benefits that can add flexibility to your investment for an additional cost.

Source: FinanceInsights

4. How to bringing down risks with capital guarantee plans?

Returns on ULIPs are directly linked to the performance of the market, thereby, making them a risky proposition. However, guaranteed ULIPs considerably reduce the risk element. Here’s how.

Unit Linked Insurance Plans (ULIPs) have become a hot favourite among investors owing to their twin benefit of life cover along with investment flexibility. Depending upon an individual’s preferences and risk profile, he/she may choose to invest in aggressive, balanced or conservative funds. Being market linked, their performance is related to the market and is susceptible to market risks.

Risks involved in ULIPs

Risk and returns go hand in hand

and different funds carry different levels of risks. While equity is the most rewarding asset class in terms of returns, it also entails the highest degree of risk. Debt instruments have relatively lower risks and volatility in returns. However, they are not entirely free of market risks. Thus, whether you invest in equity or debt funds, the capital market has an overall impact on your ULIP returns.

Reduce risks with capital guarantee ULIPs

With capital guaranteed ULIPs, equity investments can be done without the fear of downside risks. Kotak Life offers the following guarantees with its ULIPs:

1. Guaranteed Maturity Value - At the time of maturity, the policy holder receives either a fixed return on his investment or the fund value, whichever is higher.
2. Dynamic Floor Fund- To meet market volatility, the fund investments are moved from capital markets to fixed interest investments when the fund value drops below a predetermined ‘floor’ price.
3. Guaranteed returns on premium paid- Customers enjoy assured returns based on the premium paid along with incremental market-linked returns.

Thus, even when the markets are heading southwards, you can be assured of minimum guaranteed maturity proceeds on your policy.

Endnote

By opting for a capital guaranteed ULIP, you can not only reap benefits of the market’s upswings but also protect your capital from getting eroded during downturns.

Source: FinanceInsights

5. ULIPs: What, Why and How?

Here’s taking a closer look at ULIPs, one of the biggest innovations in the life insurance sector.

Investing prudently and taking adequate life insurance is the key to meet your financial goals. Here’s an ideal avenue that allows you to invest as well as insure.

ULIPs defined

Unit Linked Insurance Plans (ULIPs) are policies that provide a combination of a life insurance cover and investment. It has two components – the ‘protection component’ and the ‘savings component’. The ‘protection component’ is the life insurance cover and the ‘savings component’ is that portion of the premium invested by the insurance company on your behalf.

ULIPs - Reigning supreme

ULIPs have become very popular because of their dual role of offering risk cover and wealth build-up through investments. The present guidelines regulating these policies, flexibility, liquidity, etc. make them a preferred savings-cum-investment destination.

1. Flexibility in risk taking

For the investment portion of the premium, each ULIP offers several ‘investment funds’, each with a different equity-to-debt ratio. You have to choose the fund that matches your risk appetite. To arrive at your risk appetite, you will have to assess various parameters such as – the number of dependants, stability of present income, wealth build-up till date, your perception towards risk, etc. If your risk appetite is high, then, you can choose a fund that predominately invests in equities. If you have a marginal risk appetite, then, choose a debt-oriented fund.

2. Allows fund switching

You can switch from one fund to another in ULIPs. This allows you to ensure that the investment fund that you have chosen is in-sync with your prevailing risk appetite and market sentiments… Your risk capacity does not remain constant but changes to mirror your changing life situation. For instance, if you become a parent, then, your risk appetite will become lower, and you can switch from the earlier high equity-oriented fund to a balanced/debt-oriented fund. On the same lines, if the markets are expected to be in a bull run, then, you can switch from a debt-oriented fund to a balanced/equity oriented fund. Most ULIPs allow 3-4 free switches a year.

3. Capital guarantee

As per this feature, for certain ULIPs, if you stay invested for a pre-specified term, then irrespective of the market conditions prevailing at the time of maturity, you will receive premium, net of expenses (like mortality, sales and marketing, administration) plus declared bonuses (if any). This guarantee comes into effect when the policy's maturity value is below this sum.

4. Making top-ups

You can invest additional amounts in the investment fund of your choice, without any change in the life cover.

5. Premium holiday

You can opt not to pay premiums for your policy for a specified period, without the policy lapsing.

6. Riders

Riders are additional policy benefits that help you enhance your cover and can be added with minimal charges. Thus, for a small additional premium, additional risks can be covered.

7. Tax benefit

As per section 80C, the premium that you pay on your ULIP is eligible for a tax deduction up to Rs 1 lakh.

Assessing fund performance

You will be allocated units upon your investment. Each fund’s unit has a value attached to it, which is unique to that fund and known as the fund’s NAV i.e., Net Asset Value. Your investment value is the number of units allocated to you multiplied by the fund’s NAV. The NAV changes daily, as per the value of the fund’s total investments. The NAV movement will give you a fair idea on the performance of your fund.

Choosing the right policy

Keep the following important parameters in mind while selecting a ULIP:

• Cost-sheet

Investing in ULIPs is accompanied by various costs (premium allocation charges, policy administration charges, fund management charges, etc.). Understand the frequency and quantum of the charges.

• Past record of insurer and experience of fund manager

Investing in ULIPs is accompanied by various costs (premium allocation charges, policy administration charges, fund management charges, etc.). Understand the frequency and quantum of the charges.

To conclude

ULIPs carry many benefits. Hence, an insurance portfolio without this policy type is incomplete.

Source: FinanceInsights