Ask any individual who has purchased a life insurance policy in the past year or so and chances are high that the policy will be a unit linked insurance plan.
ULIPs have been selling like proverbial 'hot cakes' in the recent past and they are likely to continue to outsell their plain vanilla counterparts going ahead. So what is it that makes ULIPs so attractive to the individual? Here, we have explored some reasons, which have made ULIPs so irresistible.
Insurace cover plus savings
To begin with, ULIPs serve the purpose of providing life insurance combined with savings at market-linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an individual the twin benefits of life insurance plus savings. This is unlike comparable instruments like a mutual fund for instance, which does not offer a life cover.
Multiple investment options
ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple options at the individual's disposal. ULIPs generally come in three broad variants:
Aggressive ULIPs (which can typically invest 80%-100% in equities, balance in debt)
Balanced ULIPs (can typically invest around 40%-60% in equities)
Conservative ULIPs (can typically invest upto 20% in equities)
Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. Individuals can opt for a variant based on their risk profile. For example, a 30-yr old individual looking at buying a life insurance plan that also helps him build a corpus for retirement can consider investing in the Balanced or even the Aggressive ULIP. Likewise, a risk-averse individual who is not comfortable with a high equity allocation can opt for the Conservative ULIP.
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Flexibility
Individuals may well ask how ULIPs are any different from mutual funds. After all, mutual funds also offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile. The difference lies in the flexibility that ULIPs afford the individual.
Individuals can switch between the ULIP variants outlined above to capitalise on investment opportunities across the equity and debt markets. Some insurance companies allow a certain number of 'free' switches. This is an important feature that allows the informed individual/investor to benefit from the vagaries of stock/debt markets. For instance, when stock markets were on the brink of 7,000 points (Sensex), the informed investor could have shifted his assets from an Aggressive ULIP to a low-risk Conservative ULIP.
Switching also helps individuals on another front. They can shift from an Aggressive to a Balanced or a Conservative ULIP as they approach retirement. This is a reflection of the change in their risk appetite as they grow older.
Works like an SIP
Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have probably already heard of the Systematic Investment Plan (SIP) which is increasingly being advocated by the mutual fund industry. With an SIP, individuals invest their monies regularly over time intervals of a month/quarter and don't have to worry about 'timing' the stock markets.
These are not benefits peculiar to mutual funds. Not many realise that ULIPs also tend to do the same, albeit on a quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP works on the rupee cost-averaging principle. An added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP either to benefit from opportunities in the stock markets or if they have an investible surplus in a particular year that they wish to put aside for the future.
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