You should check your corpus, financial goal and risk appetite before investing in Ulips, as they are meant for long-term investment
Assessing your own financial health becomes essential because insurers charge you for withdrawing your plan before the five year lock-in period
Mumbai: Prior to 2010, Ulips was the bad apple in the basket with charges soaring up to almost 7-8% and hugely mis-sold. From 2010, the regulator has made multiple changes including limits on charges. “Currently there are about 100 plans and over 500 fund options," said Kapil Mehta, founder, Securenow.in. Ulips have two components—insurance and investment. “Because of the life insurance component Ulips have mortality charges," said Anik Jain, co-founder and chief executive officer, Symbo Insurance, a Mumbai-based insurance broker. The fund component takes care of the returns of Ulip plans.
“The NAV (net asset value) of the funds are declared every day. Your returns are basically the difference between the NAV of the present day and NAV during the entry point," said Jain. For example, if the NAV was ₹100 when you entered the plan and the NAV when you are exiting is ₹110, your returns are 10%. “Insurers word it differently but primarily we have three kinds of fund options: equity, debt and balanced," said Jain. Your returns will depend on which kind of fund option you choose. “You can opt for large-cap, mid-cap, multi-cap or small-cap fund. Five year returns of mid-cap funds stood at 12%, bond funds was around 8%," said Ayush Mittal, business head, investment, at Policybazaar.com. According to Morningstar data, equity Ulips have given returns of 4.1%, large-cap 9.85% and multi-cap funds 7.05% over a five year period. Ulips also allow you to switch between the fund options. However, switching carries a few charges.
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“It is better if Ulip returns are monitored for a period of five years or more considering there is also a lock-in period of five years and it gains stability over a longer term," said Mittal. Mutual fund schemes underwent recategorisation last year under the directives of the markets regulator. “This has little or no impact on Ulips as the product is governed by IRDAI. Also, regardless of the amount you invest, the insurance regulator has already capped the charges and net reduction in yield for the customers, so the returns or its comparison does not get impacted in any way," said Dheeraj Sehgal, chief institutional business officer, Bajaj Allianz Life Insurance. “There are quite a few charges in Ulips—allocation charges, administration charges, mortality charges and fund management charges," said Jain.
Should you consider Ulip? “Before investing, you should check the corpus, your goals and risk appetite," said Sehgal. Since there is a five-year lock-in period, assessing your own financial health and goals becomes essential because insurers also charge you for withdrawing your plan before the lock-in period ends. “Ulips are meant for long-term investments only," said Mittal. Assessing your own risk profile is also important because the risk-reward ratio for Ulips is high. Since only a certain portion of your premium goes towards the insurance component, check if the insurance cover is adequate for you.