Younger people, who usually have a longer investment horizon which allows them to handle the interim volatility, may go for them.
Leading private life insurers such as HDFC Life, ICICI Prudential Life, and Max Life witnessed a rise in the share of sum assured contributed by unit-linked insurance plans (Ulips) in the first quarter of 2024-2025, according to a report by Kotak Institutional Equities.
Meanwhile, Nithin Kamath, founder and CEO of Zerodha, tweeted recently that while Ulips promise the best of both worlds -- investment and insurance -- the reality is that they offer the worst of both.
It was best to separately buy a term insurance plan and mutual funds, Kamath added.
Market buoyancy driving shift
One key factor behind the shift in favour of Ulips is regulatory interventions.
"Irdai (the Insurance Regulatory and Development Authority of India) introduced stricter regulations. It provided clarity on the extent of charges that could be levied. It ensured more transparency on charges and better communication in this regard," says Nitin Rao, head, products & proposition, Epsilon Money Mart.
This forced insurers to introduce more cost-effective, customer-friendly products.
"Manufacturers have eliminated the policy administration charge," says Rao.
The Indian equity market's performance has also played a part.
"The continued buoyancy of the Indian market has played a major role in driving investors, especially the younger population, towards Ulips," says Nitin Mehta, chief distribution officer-partnership distribution and head of marketing, Bharti AXA Life Insurance.
Market-linked returns
Being market-linked, Ulips have the potential to offer higher returns than traditional insurance plans.
Investors can select equity, debt, and hybrid funds to match their asset allocation.
"The flexibility to switch between fund options within a Ulip allows investors to adapt their investment strategy to market conditions," says Mehta. These switches attract zero or minimal charges.
The five-year lock-in is useful for investors who tend to use up the money meant for long-term goals or withdraw money from equities during downturns.
Be prepared for lock-in
The mandatory five-year lock-in restricts liquidity.
Investors need to be prepared for volatility.
"Market fluctuations can impact returns, given the risks associated with any equity investment," says Mehta.
Some Ulips could still be expensive due to a long series of charges -- fund management, mortality, surrender, switching, and so on.
In Ulips, age affects the mortality charge -- the cost levied for providing insurance. It is higher for older people, affecting their returns.
In a Ulip, if a fund underperforms, the customer cannot move to another insurer's fund until the lock-in ends.
Who should invest?
A long horizon is a must. "Ulips are best suited for individuals planning for a significant financial milestone 10 to 15 years later," says Pankaj Gupta, managing director & CEO, Pramerica Life Insurance.
Younger people, who usually have a longer investment horizon which allows them to handle the interim volatility, may go for them, according to Mehta.
Risk-averse investors should avoid them. Those who desire greater liquidity, and the option to reduce cover, should go for a term plan-mutual fund combo.
Points to remember
Before purchasing, check the various charges associated with a Ulip.
Between type I and II, choose the one that suits your needs.
A type I Ulip provides a death benefit equal to the sum assured or the investment fund value, whichever is higher.
A type II Ulip provides a death benefit that includes both the sum assured and fund value, but usually comes with a higher premium.
Finally, understand the fund options available and assess their long-term track record.
Understanding Ulip taxation
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
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