Picking up the Right ULIP

It isn’t exactly unheard of these days to be pestered by calls from insurance agents. Often the agent’s head over heels attempts to fish you signing up for their policies leave you with unsuitable policies, heavy premiums and a lot more frustration. However, investigating and deciding by self-study is a hassle too when the options are in loads. As with the other sectors, the insurance sector is being pervaded by newer and more inventive instruments and unit linked insurance plans – popularly known as ULIPs. ULIPs aren’t typically the new kids on the block, having being around for a while now but the buoyant markets during the boom period and tales of an impending bull run, have brought them back in fashion among insurance products.

Why ULIP?
As an investor, you may quite naturally and justifiably have many questions about ULIPs. You may want to know why should you invest in a ULIP at all? Kamesh Goyal, CEO, Bajaj Allianz says, “I think the most beneficial advantage of a ULIP is that you can have investment and protection through a single instrument.” The operating principle of a conventional ULIP is simple. When you pay your premium, a portion is deducted towards the policy expense. Then, a part of it goes towards sum assured whereas the rest is invested according to the theme of the fund. The investment is visible to you in the number of units you own and the value of each unit, called as Net Asset Value (NAV). This is the variable part of the policy and often exposed to the equity markets. The manner in which the variable part is invested depends on the theme of the fund. For the sake of understanding, we can broadly classify the funds in three themes: aggressive, mixed and defensive. Aggressive funds are poised for aggressive growth characterised by high exposure to equities – usually over 60 per cent. For this reason, they are also risky. Mixed funds are less exposed to equities than the aggressive ones, however they still provide fund growth in the long run. The defensive funds have little or no exposure to equities.

The other reason for ULIPs being in vogue is that they offer extra features that traditional insurance products do not offer. Yateesh Srivastva, Chief Marketing Officer (CMO), Aegon Life Insurance informs, “Most ULIPs are rich in features such as allowing one to top-up or switch between funds, increase or decrease the protection level, or premium holidays. For example, some features automatically rebalance your investment allocation in various funds to the allocation proportions chosen, at the end of each policy year.” Riders are additional benefits that you may buy along with your policy. Riders extend the cover in events like hospitalization, illness or skipping a premium. The other popular feature of ULIPs is top-up. Top-ups are irregular cash dumps in your ULIP. This extra amount post deductions is invested and in many cases increases the value of your cover too.