By Shrutika Nagpal
Among all popular long-term investment options such as gold and real estate, equity is probably the only asset class offering recurring income through dividends and capital appreciation through bonus issues and manifold increase in share prices. Despite numerous domestic and global economic problems, an individual who invested in the Sensex in 1995 would have witnessed a 9-fold return on investment—from Rs. 3,00,000 to Rs. 27,00,000.
But stock market investments can be quite a challenge, especially because they can be time consuming and quite complex at times. Unit linked Insurance Plans or ULIPs are ideal for those who want to invest in equities but don’t have the time or knowledge to buy and sell shares directly. The premium you pay is invested by the plan’s expert fund managers into a diversified portfolio of equity, debt, and money market securities. Opting for a ULIP will help you enjoy the benefits of equity investments with comparatively lower risks and greater security.
ULIPs have had a choppy ride in the past with investors complaining about exaggerated claims, very high fees and charges, and lack of clarity on the real benefits of such plans. This prompted IRDAI, the Insurance Regulatory and Development Authority of India, to step in and introduce ULIP regulations in 2013 which have now introduced caps on fees and charges, and implemented rules about how the benefits should be designed to make ULIPs investor friendly.
Factors to Consider When Selecting A ULIP
Since ULIPs are a combination product, one must keep in mind that the insurance company will levy certain charges and fees for providing the benefits of investment and insurance within the same plan.
• Premium Allocation Charge
Generally Insurers deduct a fixed percentage of the premium as charges towards expenses related to issue of the policy. For example: a 10% premium allocation charge means that only 9/10th of the premium you pay will be utilized for purchase of the units. A zero premium allocation charge plan, on the other hand will help you purchase more units, which can translate into significant gains over the term of the plan.
• Fund Management Charge
This fee is levied for the fund management services provided by the insurer to ensure the fund’s performance is in sync with your investment strategy. While most insurers charge to the annual cap of 1.35% imposed by the IRDA, some plans charge lower rate for debt funds.
The FMC is charged as a percentage of the fund value, which means you pay more as the fund value rises over time. Since the fund’s value is likely to be highest near maturity, when investors should ideally be making the transition from equity to debt funds to secure their investments, a differentiated lower FMC for debt funds could be advantageous. Usually, insurers charge a flat fee of 1.35% for equity and debt funds both, but some do offer rates as low as 1.0% for debt fund, which can lead to huge savings.
2. Flexible Investment Strategies
A plan offering a choice between a pre-defined allocation strategy covering equity and debt assets i.e. the Lifestyle Portfolio Strategy, and a self-managed strategy is certainly a better choice than a plan that offers no choice.
The Lifestyle Portfolio option links allocation of funds to different asset classes to your age. With an aggressive high-return strategy in the initial years, your money will automatically get switched into low-risk debt assets as the plan nears maturity. This ensures the plan works in sync with your lifestyle and helps you enjoy prosperity combined with security.
In addition, a self-managed strategy offering choice of multiple funds and the option to invest your money in varying proportions can help you plan your financial goals with a lot more confidence.
3. Loyalty Additions
ULIPs are medium or long-term financial products that have the potential of earning highest returns in the latter part of the term of the policy. Loyalty addition, which refers to allocation of additional units to the fund at no extra cost to the policy holder, result in a significant boost to the fund value at maturity.
The impact of the loyalty additions is accentuated when the additions are calculated on basis of number of units owned and the NAV after the policy has run for a long time.
Related: How Ulip can help in meeting long-term goals
4. Smart Settlement
A lump sum payout of the maturity value may not always be the best option. Hence, consider a plan where payout can be received in installments spread over five years. Such a ULIP will end up, for all practical purposes, as a fixed monthly, quarterly, half-yearly, or annual income plan with lump sum payment of the balance at the end of the extended period.
A plan like Aegon Life iInvest Insurance Plan that offers all standard benefits such as assured death benefit and tax benefits u/s 80C and Sec 10(10)D along with unique benefits like lifestyle portfolio strategy, lower FMC for debt funds, and zero premium allocation charge will help you enjoy a happy combination of low-risk, higher returns, and greater stability at all times.
Source: Economic Times
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