How to select a ULIP

Confused about what the agents tell you about this investment product? Then you must read this

Unit-linked insurance plans, or ULIPs, are financial instruments that combine insurance with investment. Used intelligently, ULIPs give you the best of both worlds.

The annual premium that you pay has two functions: a small portion takes care of the insurance component, while the other larger chunk is diverted into investments.

Through its dual functions, the ULIP allows the policyholder to not only provide for the beneficiaries in the event of death, but also save for future financial goals.

Insurers offer a wide range of policies to suit different individuals, each of whom will vary in terms of financial needs, investment goals and risk appetite.

When shopping for a ULIP, it is crucial to keep all of these factors in mind in order to make the right choice.

1. Selecting the right ULIP based on risk appetite

a. Equity-based ULIPs

If generating high returns is a priority, one should opt for an aggressive equity-based ULIP. The risk here is medium to high depending on the market outlook, but it gives the best returns on investment.

b. Debt-based ULIPs

Individuals with a lower risk appetite should go in for debt-based ULIPs. These invest in relatively safer instruments such as corporate bonds, government securities and other fixed-income instruments.

c. Balanced ULIPs

These offer a mix of both equity and debt funds and allow policyholders to use the fund switch feature effectively. They can use this to rebalance their equity-debt allocation as the markets go through various bull and bear phases.

Of course, when maturity nears, policyholders can switch to the safer debt instruments.

2. Selecting the right ULIP based on investment goals

a. ULIPs for retirement planning

The policyholder accumulates a fund value that becomes available on maturity to be diverted into a suitable annuity plan.

b. ULIPs for child's education

These policies allow for goal-based financial planning, giving the policyholder access to the required sum in time to fund his/her children's higher education (or other goals).

c. ULIPs for building a corpus

ULIPs can be used in wealth creation as they allow policyholders to tap the market effectively in order to generate good returns.

d. ULIPs for healthcare contingencies

Some ULIPs allow policyholders to make claims against the policy's fund value in case of medical expenses. These can complement one's existing health insurance plans.

Additional points to remember

Think long-term

Recent months have seen a surge in ULIP surrenders (a rise of 20–25 per cent in the quarter ended March 2014) as policyholders rushed to cash in on the bull market. This is a mistake, as ULIPs show genuinely good returns only over the long term.

Not your first policy

The ULIP should not be your primary life insurance policy. But if you already have basic life insurance in place, ULIPs could help you in your wealth creation goals.

Look beyond tax planning

Annual premiums of up to Rs 1 lakh are tax-deductible under Section 80C, but do not let the taxman dictate your ULIP purchase. Let your financial goals and current income guide you instead.

Check charges

Look for plans with low charges. There are a number of charges which are levied on the premiums you pay -- premium allocation charges, fund management charges, policy administration charges are the most important ones. We now have online ULIPs which do away with most of these charges and are almost comparable with mutual funds.

The author is CEO of MyInsuranceClub.com

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