What is it?
Not many urban investors can avoid knowing about Ulips, or unit-linked insurance plans. If it were pesky agents who would call till you bought earlier, more recently it has been the huge news surge around them. So, what are Ulips and why are two regulators fighting over it? It is a complex financial product made of two components: insurance and investment.
You invest by way of a premium. A part of this premium buys you a life cover and a part goes towards market-linked investments like that done by mutual funds (MFs). Hence, the sales pitch: it is an MF with free insurance.
How is your money invested?
A chunk of your money gets bitten out at the outset as policy allocation charge. Up to 40% of your premium can go towards agents’ commissions and other sales-related costs. Of the remaining money, a part goes as premium on a pure life cover and the rest towards investment. Here you have a choice of three basic funds: debt, balanced and equity. You can also go for various cocktails of these three. Unlike a traditional policy, Ulips give you the flexibility of choosing which part of the market you want your money to work on.
How much insurance you get?
Depending on how much insurance you choose, a part of your premium goes towards insurance charges. Your sum assured, or the money the family gets if you die, can be five to 25 times the premium. The industry norm is around 10 times. So, if your annual premium is Rs1 lakh, your sum assured is Rs10 lakh.
What are the charges?
Typically, there are four sets of charges. While premium allocation charge hacks away your premium before any investment, others such as mortality (charge for insuring your life), policy administration charge and fund management charge are deducted after your premium is invested.
The confusion stems from misinformation in advertisements and at the point of sale. Instead of first securing a life cover, customers end up buying more investment. Financial planning rules mandate that the life be secured with a large insurance cover before a rupee of investment is made. The other problem is lack of transparency on costs, returns and period of premium payment. A lot of sales pitches are around a three-year premium paying term. But, to be useful, a Ulip needs to be funded and held for at least 10 years. The confusion between investment and insurance has led to the recent regulatory spat. Because it’s sold as an investment product, the capital market regulator wants to use MF norms on it. The insurance regulator doesn’t want to let go.