How to choose unit-linked insurance plans

There are numerous unit-linked insurance plans available in the market today. It is often confusing to zero-in on one. Here’s a low-down on ULIPs and how to pick one.

A ULIP is a combination of insurance and investment. The objective of a ULIP is to maximise your wealth and provide an insurance cover. An investor is required to pay premium for a specified period like any other insurance policy, and accumulates units. Insurers allow yearly, half-yearly and monthly premium payment.

A small amount of the premium paid goes to the life insurance and the rest of it is invested in market instruments — either in equity or debt funds, or both. The working of a ULIP is similar to that of a mutual fund, and is subject to market risks.

A ULIP holds a certain number of fund units that have a net asset value (NAV). This is the value on which the returns of the ULIP are determined. Based on the market condition and the fund performance, the NAV for each ULIP varies.

Take a pick

You can withdraw your investment any time after completing five years (minimum lock-in period). Even if you stop your premium payment before that, the ULIP can be withdrawn only after five years. Here is how you can select a ULIP.

First and foremost, look for the plan charges. Insurers levy a few important charges on ULIPs for premium allocation, policy administration, surrender, mortality, fund management, fund-switching, discontinuance, etc. These expenses reduce the amount invested in the fund, lowering the fund value. Compare the ULIPs and their charges and pick the one with the lowest.

Most of the online ULIPs have lower charges than offline ones. For instance, HDFC Life Insurance’s Click2Invest (online plan), has no policy administration or premium allocation charge.

You should also look for the fund investment options available in ULIPs — equity, debt and a combination of both. For instance, consider Bajaj Allianz’s Goal Assure plan. It provides eight fund options and four investment strategies. It invests in a combination of equity, bank deposits, fixed income securities, mutual funds, money market instruments and debt instruments. You, as an investor, can pick a fund option and a strategy that suits your risk appetite. Returns from your investment is an important factor to be considered while selecting a ULIP. Check the plans’ historical NAV growth or the performance of the funds over the years. It is better to choose a plan with a stable and consistent growth record.

Flexibility in premium payment and tenure of payment should also be looked into. Also, look for plans that allow you to pay additional premium (top-up option) in the future if you want to increase your fund value. An additional premium will increase your insurance cover, too.

Similarly, search for ULIPs that offer flexibility in switching between the fund options. Some of the online plans offer unlimited switches, while others offer limited free switches in a year (any additional switches will incur charges). Withdrawal or surrender of fund should also be kept in mind. There are funds that allow partial withdrawals with nil or minimum charges.

Lastly, have an eye on the insurance cover and the rider options (add-on covers) available.

Note that the maturity proceeds of ULIPs are exempt from tax, subject to certain conditions. Similarly, you get to claim tax deduction for the premium paid towards your ULIP under Section 80C.