Know all about ULIPs
Priya Kapoor

A look at the types of Unit Linked Insurance Plans, how they work, and what the subscriber ought to look out for.

Till recently, individuals seeking to provide protection to their family had no other option except a life insurance term plan. The plan promised a stipulated amount to the family of policyholder in the event of his death.

However, the insurance sector has evolved over the last few years and a number of innovative products have hit the market. One product category that is increasingly catching the fancy of individuals is the Unit linked Insurance Plan (ULIP). These plans, a combination of insurance and investment, provide the policyholder with life cover and additionally offer the opportunity to earn a return on the premium paid.

How ULIPs work


ULIPs work on the lines of mutual funds. The premium paid by the client (less any charge) is used to buy units in various funds (aggressive, balanced or conservative) floated by the insurance companies. Units are bought according to the plan chosen by the policyholder. On every additional premium, more units are allotted to his fund. The policyholder can also switch among the funds as and when he desires. While some companies allow any number of free switches to the policyholder, some restrict the number to just three or four. If the number is exceeded, a certain charge is levied.

Individuals can also make additional investments (besides premium) from time to time to increase the savings component in their plan. This facility is termed "top-up". The money parked in a ULIP plan is returned either on the insured's death or in the event of maturity of the policy. In case of the insured person's untimely death, the amount that the beneficiary is paid is the higher of the sum assured (insurance cover) or the value of the units (investments). However, some schemes pay the sum assured plus the prevailing value of the investments.

Key types



There are various unit linked insurance plans available in the market. However, the key ones are pension, children, group and capital guarantee plans. The pension plans come with two variations — with and without life cover — and are meant for people who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at taking care of their educational and other needs. The Children's Dreamz Plan offered by Birla Sun Life Insurance and Young Star offered by HDFC are good examples of unit linked children plans.

Apart from unit-linked plans for individuals, group unit linked plans are also available in the market. The Group linked plans are basically designed for employers who want to offer certain benefits for their employees such as gratuity, superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan promises the policyholder that at least the premia paid will be returned at maturity. But the guaranteed amount is payable only when the policy's maturity value is below the total premium paid by the individual till maturity. However, the guarantee is not provided on the actual premium paid but only on that portion of the premium that is net of expenses (mortality, sales and marketing, administration).

Market-linked returns


Though there are various benefits attached to buying a unit linked insurance product, the return on the ULIPs is directly linked to the performance of the stocks or bonds it invests in. An individual must remain prepared for bullish as well as bearish market conditions. Gaurav Mashruwala, a certified financial planner, says, "Usually people consider a scenario of the market going up while buying Unit Linked Insurance Plans. However, it is important to look at the other side of the coin too. If the market goes down, the fund value will also decline. Individuals easily give in to the illustrative returns presented by the sales person, projecting a 6 or a 10 per cent growth in the years ahead. What if the market crashes? This aspect has also to be kept in mind while parking money in Unit plans".

(The author is a Faridabad-based freelance writer.)

http://www.blonnet.com/iw/2007/06/10/stories/2007061000961300.htm

What to check out

Every individual needs to ask his/her advisor the following questions before investing in a ULIP.

What are the total expenses charged?

If an individual is keen on making money through ULIPs, it is important to know the various expenses the policy entails. The charges, meant to recover various costs, eat into the returns of the policyholder. Therefore, before buying a ULIP, an individual must ask his advisor to provide him with two concrete numbers. One, the value of the fund at the end of the term, without the impact of charges, and, two, the value of the fund after deducting charges. The fund with a wider gap between the two is the more expensive one.

How much of the premium would be actually invested?

In ULIPs, the whole of the premium you pay is not invested. The insurance company offering the product usually deducts certain charges from the premium money and invests only the balance. It is necessary to know from the advisor what proportion of the actual premium would be used for making investments, as the returns would be made available on the net premium (premium less charges) and not what the investor shelled out.

What would be my life cover?

Insurance policies are meant basically to provide you with a life cover. Though ULIPs combine insurance and investments in one product, an individual must be aware of the extent of protection that a policy offers and the number of years of life cover provided.

How is the premium allocated?

Allocation is another very important factor that cannot be overlooked. The individual should ask the agent to provide details of how assets will be allocated between different classes — equity, debt and cash.It is not enough to opt for an aggressive growth fund, you should know the exact percentage of equity and debt in it. The allocation would determine the returns you can expect from your chosen fund.

What is the ULIPs' track record?

The most significant question, however, is about the product performance. An individual must opt for a fund that has shown consistently good performance over the past few years. An agent must be asked to disclose the fund's fact sheet for at least a three-four-year period.

Priya Kapoor
http://www.blonnet.com/iw/2007/06/10/stories/2007061001011300.htm