Ever since unit-linked insurance plans (ULIPs) made their debut, they have become a subject of much discussion and debate. On the one hand, they were a trifle too complicated for individuals not yet exposed to the stock markets; on the other hand, they were much-maligned because of the 'unusually high' costs.
As ULIPs made their presence felt, insurers were more open to discussing the costs and how they evened out over the long term. This and the flexibility that ULIPs offer became important points that made individuals consider adding them to their portfolios.
Today, more individuals are open to using the ULIP-way to create wealth over the long term. Here we outline exactly how ULIPs can help you fulfill that responsibility.
If you are between 25 and 35 years of age
You are young, probably married and even have kids. If you are the sole breadwinner in the family, then you have quite a few responsibilities to fulfill right from planning for your child's education/marriage to planning for your own retirement to providing for the family in your absence.
The last responsibility is the most critical and ironically it is the easiest and cheapest one of the lot to fulfill. At Personalfn, we have always been votaries of term insurance -- the cheapest way to get a life cover for yourself.
Term insurance is also insurance in its 'purest' form, in other words there is no savings element in it, which ensures your premiums are very low. There is no better product to provide for your family in case of an eventuality and all individuals must consider taking a term plan.
Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves you with a problem. If term insurance is only going to take care of the 'risk' element, who is going to take care of the 'savings' part.
This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance element, they do, but it is limited largely to the earlier years and after a point they don the mantle of an investment product.
So how can ULIPs help you save for child's education/marriage, planning for retirement and other investment-related objectives? ULIPs can do all this and more because they come with a lot of variety.
Consider this; except for term insurance (because it does not make sense), just about every life insurance product has a ULIP option. So you have endowment ULIP, child plan ULIPs and pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP products; they don't have traditional endowment, pension and child plans at all!
What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot of your financial objectives.
If you are looking to set aside some money for your child's education, the 5%-6% return on an endowment plan may not even take care of inflation, let alone provide for a medical or MBA degree. The return you earn on a child plan should not just counter inflation, it should be enough to cover the cost of education.
And the way cost of education is spiralling, your insurance plan must work very hard. Given their equity component, ULIPs are ideally placed to fulfill this role.
As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the equity component varying right from 0% to 100%. This ensures that you are able to select an option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve your financial planning needs.
You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for your child's future and your own retirement. ULIPs can help you achieve both. Although you can take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a demarcation between the needs and take separate ULIPs dedicated to each objective.
Opt for a ULIP child plan to provide for your child's higher education, marriage and seed capital for business to name a few needs. One way to handle this multi-faceted objective is to take a ULIP money-back plan. This way you get monies at regular intervals to address multiple needs.
The other important plan that individuals must consider taking earlier on their lives is a pension plan. Building a corpus to face the rigours of retirement should be given the priority it deserves.
Again, a long-term investment objective like retirement planning could do with an equity 'push'. Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP endowment plan can help you meet investment objectives like buying property or setting up a business for instance.
If you are between 35 and 45 years of age
By the time you reach the 35-45 age bracket, some of your existing ULIPs are probably nearing maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this age bracket to coincide with the need (higher education/marriage) you had in mind at the time of taking the ULIP.
However, if you married late or did not begin planning your finances at an early stage in your life, now is the time. If you haven't insured yourself as yet, go for a term insurance plan.
The advantage of taking a term plan at a slightly advanced age is that you have a better idea of how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your cheapest option no matter when you take one.
You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket depending on your needs. Remember, unlike endowment, which gets really expensive at an advanced age, ULIPs because of the way they are structured, do not turn out that expensive.
If you are over 45 years of age
In this age bracket, it is likely that you are insured. However, you still need to review your insurance cover taking into consideration the changes in your lifestyle, income, needs and financial commitments. Beef up your insurance cover through a term plan.
By this time, your ULIP pension plan will have matured. You can then opt for an annuity, immediate or deferred, depending on your requirements.
6 points to note
Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimise the benefits associated with them.
- Notice we have recommended ULIP child plans/pension plans and even term insurance for most individuals. When you opt for these plans it is important you do this after taking your insurance consultant into confidence. He is the one who is going to help you with the numbers, so you need to tell him exactly what you are looking for in an insurance plan.
- Remember there is an insurance cover associated with ULIPs. Since it is also likely that you have other insurance plans like term and/or endowment, it is important you have a clear idea of exactly how much your insurance cover is worth after considering all your insurance plans. This number will prove helpful when you review your insurance cover at regular intervals.
- Likewise, ULIPs also have an investment element. You are likely to have investments in mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market value of all these investments while calculating your investment worth. This number will prove useful when you wish to beef up your investments in a particular asset.
- ULIPs derive their 'power to perform' from equities. When you have a lot of aggressive ULIPs in your portfolio it means that you are overweight on equities. Add to this your investments in stocks and equity funds, and your exposure to equities increases even further. To temper your equity exposure, it is generally advisable to opt for conservative/balanced ULIPs (maximum 50% equity exposure).
- Even if you are a high-risk investor, you must gradually shift your assets to a conservative ULIP option as your age advances. Financial prudence dictates that risk reduces as age increases; this needs to reflect in all your investments including ULIPs.
- Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due to several reasons with financial prudence being the most important reason. Varying flexibility levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP from more than one insurance company. Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance companies to keep expenses on the lower side.
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