Covering risk while earning money

A combination of risk coverage, returns make it worth a while to look at ULIPs

There are a variety of life insurance policies.

While term policies cover only death risk and for a given period, whole life policies offer longer coverage periods with options like return of premium and other add-ons. It is the endowment policy that offers some return on the premium paid over and above just coverage. This return, or bonus, is a share of the returns that the life insurance company realises when it invests your premium and is usually more modest than even bank fixed deposit interest.

The Unit-Linked Insurance Policy (ULIP) offers life coverage and a larger component of investment. However, this investment is linked to the capital market returns on the premium funds that are invested. We can infer that the risk profile of this investment is pretty different from other life insurance policy bonuses because, in the case of the latter, the funds are invested according to prudential norms laid out in the insurance regulations designed for the safety of funds and not to maximise returns.

In short, ULIP returns are subject to market risk while affording an opportunity for higher returns.

It is also one policy where you, as policyholder, can choose the bouquet of investments your funds should be deployed in. Funds are usually in distinct asset classes or specified combinations of asset classes. A high-risk fund would be largely in equities where the returns can also be commensurately high. A low-risk fund would have investments largely or wholly in debt securities while a medium-risk fund would have some combination of the two.

So, the policy pays out a death benefit should the policyholder die during the policy period. If he survives, he gets the maturity value of the ULIP. The death / maturity benefit is an assured sum and unaffected by the ULIP maturity value which is nothing but the value on that date of the investments in the fund of his choosing. Even if the value of the ULIP investments are less than the sum assured, the death benefit is assured.

Carrying flexibility

ULIP has some flexibilities. You can choose any option of fund to invest in and you can switch from one fund to another as well. You can top-up your ULIP policy any time and also direct future premiums to go into a specified fund. Partial withdrawals are also possible.

Staying invested also brings loyalty additions and bonuses which add value to your investment. Premium paid for a ULIP policy has tax benefits under Section 80C of the Income-Tax Act, 1961 and maturity proceeds are tax-free under Section 10 (10) (d) subject to certain conditions.

ULIPs should be actively managed for better returns. You should study your own risk appetite, the stage of life you are in and your financial goals in order to make intelligent decisions. Some policies have systematic transfers from one asset class to another or a life-cycle-based strategy that automatically switch your funds.

Capital market investments in equities, typically, are long term in nature so you should also take a long-term view on your ULIP investment strategy given that there is a five-year lock-in period anyway.

ULIP funds of insurance companies have published track records and studying these to decide on a strategy would be a good idea.

The other important thing to track is the charges in various ULIPs. Be sure you choose one with lower charges so that more of your money is invested and earns you returns.

(The writer is a business journalist specialising in insurance & corporate history)

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