Look at any advertisement for a life insurance product and chances are that it will be for a unit linked insurance plan (ULIP). Such has been the popularity of ULIPs in the recent past that they have outpaced the growth of regular endowment plans.
We take a look at the most important reasons why ULIPs score over endowment plans.
1. The power of equity Simply put, ULIPs are life insurance plans, which have a mandate to invest upto 100% of their corpus in equities. While individuals have the choice to shift between equity and debt (explained later in this article), several studies have shown that equities are best equipped to deliver better returns compared to their fixed-return counterparts like bonds and gsecs. And given the fact that life insurance is a long-term contract, equity-oriented ULIPs augur well for the policyholder.
2. Flexibility
While ULIPs offer the opportunity to invest upto 100% in equity, it is also true that ULIPs provide individuals the flexibility to shift to upto 100% debt. It is entirely upon the individual how he wishes to allocate his premiums between equity and debt.
This is not the case with endowment type plans- individuals can't choose their investment avenues and have to be content with the insurance company's investment decisions which revolve largely around debt.
ULIPs are available in 3 broad variants: 'Aggressive' ULIPs, which invest up to 100% of their corpus in equities, 'Balanced' ULIPs which invest up to 60% of their corpus in equities and 'Conservative' ULIPs which invest upto 100% of their corpus in debt instruments and the money market instruments*.
Individuals are free to decide where they want to invest their money. For example, individuals with an appetite for risk can invest their entire money in equities while conservative individuals have the option to park their money in balanced or conservative ULIPs.
* The percentages given in the paragraph above may differ across life insurance companies.
That apart, ULIPs also provide individuals with the flexibility of terminating/resuming premiums, increasing/decreasing premiums and paying top-ups (i.e. a one-time sum over and above the regular premium) whenever possible. These options are not available in regular endowment plans.
3. Transparency
For the first time, ULIPs introduced transparency into the manner in which life insurance products were being managed. This is something that was missing in conventional savings-based insurance products (like endowment/ money-back/ pension plans).
To understand why we are saying this, one has to first understand the structure of traditional endowment plans. Traditional endowment plans have been opaque in more ways than one.
To begin with, traditional endowment plans have invested a sizable portion of their corpus in debt instruments like G-secs and bonds. The quantum of money invested is not known. Individuals do not have access to portfolios of endowment plans so they never find out how much money is in debt/equities.
Add to this the fact that the expenses, which form a sizable percentage of the premium in the first few years, are also not clear and you have a situation where the individual is 'investing' in life insurance purely on the basis of faith and little else!
Unit linked plans brought transparency into the scheme of things. Today, if an individual wants to invest in a ULIP, he knows upfront what percentage of the premium is being invested, what are the charges being levied and where his monies are being invested. This is a welcome change for the policyholder.
Another advantage ULIPs offer is that they enable insurance seekers to compare plans across companies and help him buy a plan that fits well into his portfolio. Also ULIPs disclose their portfolios at regular intervals, so you know exactly where your money is being invested.
4. Liquidity
ULIPs offer liquidity to the individual. He can withdraw money anytime he wishes to once the initial years' premiums are paid. He will not be levied with any surrender charges i.e. he stands to get the full market value of his investments, net of charges, till date. This is unlike conventional endowment plans where individuals tend to lose out on surrender charges on surrendering their policies.
Besides, part surrender is also allowed in ULIPs. Simply put, part surrender allows individuals to withdraw a part of their corpus and thus keep the policy alive, albeit with some adjustments. This helps individuals tide over a situation where they need cash but have few 'liquid' investments at their disposal.
So does this mean that it is the end of the road for endowment plans? Not quite!
Individuals need to understand the de-merits of investing in market-linked products like ULIPs. The latter are susceptible to the vagaries of markets and can burn a hole in your portfolio over the short term. So if you can't withstand that kind of volatility, equity-oriented ULIPs are not the right investment option for you.
Insurance seekers would do well to take into consideration their risk appetite as well as their overall financial portfolio before taking a final call on ULIP investments. The ideal option is to have a prudent mix of endowment and ULIPs depending on your preference for either long-term growth or stability.
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