When you go around hunting for the most suitable insurance product for yourself, you are likely to come across two wide varieties: pure insurance products like term insurance plans and Unit Linked Insurance Plans, or ULIPs, for short. To begin with, it is helpful to understand what these products are.
Tradition insurance plans in India comprise of term insurance plans and whole life insurance plans. A whole life policy stands throughout the life of the insured as long as premiums have been paid, with the maturity age capped at 100 years. Term insurance plans provide you financial protection for a fixed period of time, as stated in the policy documents. Term insurance is a pure protection plan. If you worry about your family being able to look after themselves in the unfortunate situation of your untimely death, then you would be keen to enroll in a plan that provides larger protection. So, when you pay the premium, you seek a plan that will direct the entire premium towards mortality charges or in simple words, towards the cost of insurance. Term insurance plans do exactly that. You can be assured for a fixed cover for your family that can help safeguard their financial future in your absence. They also come with additional riders. For example, the Canara HSBC Oriental Bank of Commerce Life Insurance iSelect Term Plan is a pure protection plan, like the one described above. In addition to the life insurance and critical terminal illness cover, it also extends a cover against accidental death/disability.
Unit Linked Insurance Plans that add another dimension to the insurance offering. A ULIP also offers an element of investment. Along with the life cover benefit, you also get the opportunity to invest for wealth creation. Here is how that works: the premium that you pay for a ULIP is split into two parts. One part is deducted and directed as mortality charge or the cost of insurance, just like in traditional plans. The other part is invested in funds, to further the goals of wealth creation. This investment is done in accordance with your risk appetite and risk preference. For someone who is comfortable taking risk for the possibility of a higher return, it is befitting to invest in equity funds. For someone who is conscious and wary of such risks, investment may be tilted toward safer options like debt funds.
What are the aspects you need to know before you invest in ULIPs?
- ULIPs provide investment apart from the protection that insurance plans provide. This makes them suitable for those who seek to serve two of their financial goals, that is, protection and wealth creation, with the same plan.
- The nature of the plans also changes the return you get from a policy. In the case of ULIPs, the returns are market-linked. Now since they are dependent upon the choice of investment funds and investment style chosen in accordance with your preferences, returns are never known with absolute certainty.
- ULIPs come with a lock-in period of 5 years. This means that you cannot withdraw from the plan before 5 years have passed without incurring penal charges for this. After 5 years, however, you can choose to discontinue.
- ULIPs are a little more complex than a simple insurance plan, so they come with more charges such as mortality charges, fund management charges, funds switching and administrative charges, surrender charges, partial withdrawal charges. Of these, only the mortality charges and premium allocation charges are applicable on traditional plans.
- On the parameter of flexibility, ULIPs score higher as they offer the option of funds switching and transparently operate the portfolio.
Conclusion:
If you at the crossroads where you have to make a choice whether to invest in ULIPs or not, it would be worth considering these parameters. It is advisable to ask yourself if your wealth creation goals can be met by ULIPs or if the insurance cover that ULIPs provide would suffice? It is imperative to keep the goal of financial protection paramount if you have a family that depends on you!
