The Hindu Business Line : Rest insured

One of the by-products of the opening up of the insurance sector to private players is the emergence of the concept of Unit Linked Insurance Product (ULIP).

This is an alternative to the traditional insurance plan, where, as per the IRDA (Insurance Regulatory and Development Authority), up to 85 per cent of the investments are to be made in government securities, bonds and other debt instruments. Several insurance companies have since taken advantage of the bull run that began in 2003 to launch ULIPs with the promise of better returns.

Features

Compared to traditional insurance products, ULIPs, with a better range of investment options, are more transparent when it comes to disclosure of expense ratio. In general, insurance policies are sold based on the age of the individual, but in the case of ULIPs, the insurer fixes the minimum premium payable, regardless of the investor's age.

Unlike traditional plans where non-payment of premium causes the policy to lapse, ULIPs require mandatory payment of premiums over a three-year period.

Subsequently, even if the insured fails to pay the premium, the policy will remain alive. The premium due for that year can be clubbed and paid together with the next year's.

ULIPs go by different names depending on the investment style. But typically 0-100 per cent of the investment is made either in liquid, debt or equity or a combination of all.

ased on the individual's risk profile, the exposure to equity component is decided. But if you are a savvy investor, you can switch between debt and equity based on the market conditions.

Most insurance companies offer this switch facility free of charge for a certain number of times in the year.

Initial charges, between 7 per cent and 30 per cent, are levied for the first few years, apart from administrative expenses.

Mortality charges are deducted from the premium paid and vary as the policy progresses, along with growth of the corpus.

Pros

Returns are market-based.

Flexibility to move between the investment options without any additional charge at least few times a year.

Partial withdrawal facility after the minimum three-year period.

Top-ups are permitted in the same policy with minimal charge.

Risk cover ensures the targeted amount from Day One if anything untoward happens to the insured during the policy period.

Risk cover continues even if the premiums are not paid after the initial years, subject to the availability of the corpus towards mortality and other charges.

Reduction in premium allowed, subject to the minimum.

Cons

Too early to predict the performance since the ULIP is yet to see any sustained bear market.

Higher initial charges leave lower investible amount even in a bull phase.

More Stories on : Life Insurance | Investments | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page