TomorrowMakers

Learn how ULIPs can help you meet long-term goals

How Ulip can help in meeting long-term goals

By Sunil Dhawan

Financial protection as well as investing adequately for one's future needs are something every investor usually strives for. While both of these can be dealt separately, there are products like unit linked insurance plan (Ulip) that cater to both of them. Ulip is a market-linked insurance product and hence is apt for meeting long-term goals. There are various features in Ulip which can be put to use for achieving this purpose.

Putting features to use
Financial needs vary at different life stages of an individual. Features of Ulip such as partial withdrawals, multiple fund options, different premium payment options and mode may be used to customise one's savings schedule. Once the lock-in period ends after five years, Ulips allow one to make tax-free partial withdrawals. As and when a goal is near, you may withdraw partially from your Ulip fund to meet the need.

Further, depending on the need one may opt for different policy term options- from single premium to limited premium term. Under limited premium term Ulip, one pays premium for a limited period, say for five years, but the policy term may be longer. Another important feature is the top-up facility in Ulips. Naval Goel, Founder & CEO, PolicyX.com, says, "There are a few things you need to keep in mind while purchasing Ulips, namely coverage offered by the chosen plan, your risk appetite, switching flexibility, and reputation of the company, premium payment options, charges, limitations and exclusions as well."

Plan the right move with premiums and top-ups
Opt to go monthly in Ulip through the SIP mode. Monthly investments help in averaging the cost of units and also instil an investing habit. Use the top-up option in Ulip to park any additional investible surplus available. Top-ups not only reduce the overall cost of Ulip for the policyholder but also increase the life cover. Top-ups are usually charged at 1- 2 per cent, which is less than the charges on the premium originally committed. Hence, top-ups mean buying more units at a lower cost. Therefore, this lowers your total average cost. Buying a new Ulip could cost you much more. Also, every top-up has an insurance element, which helps increase total coverage as one becomes older and builds up liabilities.

Plan life stage needs
Identify your long-term financial needs and estimate the amount required to fulfill them after adjusting for inflation. Most insurers' websites carry tools, called Human Life Value (HLV) calculator, to estimate one's insurance requirement. You can also sit with your insurer's representative and ask him/her to generate a Ulip 'illustration benefit' based on your age, term, sum assured and the amount needed to meet various goals at different life stages.

At a given sum assured, see how much premium needs to be put, so that the fund value at each life stage meets your requirement at that point of time. The minimum sum assured has to be ten times of the premium, but for someone using it for lifetime goals, taking a coverage of 15-20 times of annual premium helps.



Making use of fund options
Post the applicable charges, the premium paid is invested in one or more fund options in a ULIP. Most Ulips have 5 to 9 fund options with varying asset allocations between equity and debt. Further, within equity funds, some could be large-cap while others could be mid-cap funds. A few Ulips may have multi-cap and thematic exposure too. The debt fund options may include liquid to short-term and long-term debt funds.

Any switching between such fund options irrespective of the holding period is exempt from tax. However, considering the long-term nature of goals, one doesn't need to time the markets and hence one should avoid the temptation to switch between funds every time the market moves 500 points up or down.

For all your goals which are at least ten years away, opt for large-cap funds as they invest in well-established blue-chip companies and are therefore less volatile. Stick to diversified funds in Ulips and avoid thematic funds. A portion of the premium can be put into mid-cap funds too. It is suggested that one de-risks funds by gradually shifting from equity to less volatile debt funds by starting this process at least three years away from the goal.

For all those investors who cannot decide the allocation, most Ulips offer asset allocation tools which ensure that the fund investment in the policy is linked to your life stage. These tools ensure that at a younger age, allocation of premium to equity funds is high while as one grows older, the proportion reduces and funds move into less volatile debt funds.

Drawbacks
One big drawback of Ulip is linked to its fund performance. If the fund doesn't perform, early exit (after a lock-in period of five years) would be costly. To minimise the impact of this drawback, one should carefully evaluate Ulip not just in terms of features but also in terms of fund performance. While zeroing-in on the right Ulip, compare its equity fund performance over the years with its benchmark.

Conclusion
A single Ulip, if used well, can help in meeting goals at different life stages. Remember, every time a new Ulip is bought, there is an administrative cost involved which can easily be avoided if all your investments are in a single Ulip. The inbuilt flexibility and transparency make it a suitable investment for long-term goals, provided it is bought for the right reasons.

Source: Economic Times

Related Article