Unit-linked insurance plans (Ulip) have been in the spotlight for years and usually for the wrong reasons. High commission structure for agents, mis-selling and high cost structure have primarily been the cause for concern among investors that discouraged them to invest in Ulips for achieving their goal of wealth creation.

While Ulips were once reserved as high-cost structure products, this shouldn’t hold back the investors now from planning for their life goals by investing in Ulips.

The Insurance Regulatory and Development Authority of India (IRDAI) and the industry have made it easier to invest in Ulips by addressing the investors’ concerns in terms of low-cost and investor-friendly products.

Here we look at the common myths about Ulips that needs to be dispelled to help investors understand its many benefits for achieving their life goals.

• Myth: Ulips are costly
• Truth: Ulips have become more cost-effective over the years and offer complete value for your money

Most people see Ulips as expensive because of the charges associated with them. However, the insurance regulator has taken many steps to address this. The regulator has capped fund management charges at 1.35 per cent. Allocation charges have been reduced as well, and today there are either no or really low allocation charges in Ulips.

Overall there is a cap on the maximum charges on a Ulip on a year-on-year basis. And, with the current trend in online buying, many new-age Ulips have done away with the premium allocation charge, thus making it one of the preferred investment product buyers can trust their money with.

Few life insurance companies are also returning the mortality charges paid by the policyholder against the life cover provided in a Ulip. This is called return of mortality charges. This is a significant change from the past and makes Ulip more cost-efficient.

• Myth: Ulips yield low returns
• Truth: Ulips offer substantial returns

A Ulip is a long-term investment product that allows you to better manage the market volatility when you stay invested for a longer time. If you consider the long-term performance of Ulips, say 10 years or more, Ulips have given consistent returns.

Ulips are also exempt from long-term capital gain tax, thus increasing the end returns for investors.

In addition to these benefits, Ulips give you an insurance cover that ensures you and your family achieve your life goals and aspirations.

• Myth: Ulips carry high risks
• Truth: Policyholder can choose the level of risk by opting for funds of their choice

According to your life goals and risk appetite, Ulips offer you the choice of having a diverse investment portfolio by investing in equity, debt or balanced funds.

Opting for various types of funds helps in diversifying the risks for investors. You are further allowed to switch between funds to optimise the market returns.

If you are not keen on taking high risk, you can opt from a range of debt or balanced funds that are relatively less risky and provide moderate returns.

• Myth: Market unpredictability reduces insurance cover
• Truth: Insurance cover stays the same irrespective of market unpredictability

Some customers worry that the death benefit on their insurance cover would be compromised if market fluctuations take place. However, the fact is that the sum assured of the life insurance cover does not alter at all, regardless of the market volatility or fluctuations.

In the event of the policyholder’s death, the life cover or fund value, whichever is higher is paid by the insurer. Few Ulips give the sum assured plus the fund value as the death benefit.

The biggest advantage of Ulips is that it is a bundled product which provides investors a life cover, besides aiding in wealth appreciation over the long-term. Further, the reformed regulatory environment has reinforced Ulips as a reliable and customer-friendly investment solution to achieve long-term financial goals.

POINTS TO PONDER

Do’s and dont’s before buying Ulip

• Define your goals: Ulips are for long-term wealth creation. It is important that you define what goals you wish to achieve through this investment to avoid any future disappointment
• Know your risk appetite: Your risk appetite will determine your asset allocation. If you are risk averse and do not want to invest in volatile assets, allocate more funds towards debt. If you are not apprehensive of market volatilities, you may assign more funds towards equities.
• Re-balance your allocation: Some products offer an option to automatic rebalance asset allocation as you grow older. As the age increases and policy nears maturity, the plan shifts the asset allocation from riskier assets to conservative ones
• Investment timeframe: Knowing your risk appetite is not enough, you must also decide how much money you are willing to pour into this instrument. This will enable you to decide your investment timeframe

The writer is chief institutional business officer, Bajaj Allianz Life Insurance