Most investors tend to identify ULIPs as synonymous with traditional endowment plans.
The current understanding of Unit Linked Insurance Plans (ULIPs) is nothing but a concoction of various myths surrounding them. And the misconceptions about ULIPs are the result of rampant mis-selling of these products in the past, when high commissions were available for those distributing them in initial years.
Even today, among all the investment opportunities that people take into consideration, the idea of buying a ULIP ranks low, owing to the continued misunderstanding about the product’s purpose, pricing, returns, ease of liquidity and mode of functioning.
Here are common myths on ULIPs that need to be busted this financial year in order to get the benefit of both insurance and investment with better returns.
Myth 1: ULIPs are costly
When ULIPs were first introduced in the market, they were positioned in a manner that suited to distributors more than customers. Prior to the intervention of the Insurance Regulatory and Development Authority of India (IRDAI) in 2010, a major percentage of the premium paid by customers went towards charges of policy administration, premium allocation and fund management.
Regulations by the IRDAI have led to capping of costs that were earlier charged by insurance companies. As opposed to the earlier charges that ranged 6-10%, insurance companies now charge as low as 1.5-2%. In addition to this, widespread digitisation has resulted in intermediary charges like policy administration and premium allocation being completely eliminated, thus making ULIP a wonderful investment product, one which consumers can trust their money with.
Myth 2: ULIPs yield low returns
Most investors tend to identify ULIPs as synonymous with traditional endowment plans. This causes them to refrain from putting money in ULIPs, fearing low returns. It is necessary to understand that in ULIPs today, only a minimal percentage of the premium is allocated for payment of the insurance cover, leaving a substantial portion to be invested to earn returns. The quantum of returns, however, depends on the risk appetite of the investors.
The nature of returns earned on ULIPs over the past five years can be understood from the following table:
Data updated on 17th march 2018 for five year returns.
Myth 3: ULIPs carry high risks
Many people misconstrue ULIPs to be a risky investment. This is because they believe the premium paid to buy ULIPs is invested in equity funds only.
What they do not know is that the money invested in ULIPs is allocated to various funds depending on the risk appetite of the consumer. The investors are asked about the level of risk they are ready to undertake and also informed about the switching options that can be availed to make judicious use of their funds depending on the volatility of the market. Risk-averse customers can choose from a range of debt instruments, government securities and corporate debt instruments that are low in risk and give moderate returns.
Myth 4: Market volatility dampens insurance cover
Since part of the premium paid is invested in money markets, some customers fear that the insurance cover promised would be reduced due to fluctuations in the markets.
The reality is that the amount of life cover remains the same throughout the policy term, irrespective of volatility in the markets. According to IRDAI regulations, the minimum life cover or sum assured in ULIPs is 10 times the yearly premium for policyholders. In case of death of the insured party, the insurance company is liable to pay the promised life coverage or fund value, whichever is more.
No mystery surrounds ULIPs. Various features of a ULIP are available on the official websites of insurance companies as well as on the sites of insurance aggregators. Continuous improvement over the past few years have made ULIPs one of the best investment options as they combine the benefits of wealth creation and insurance cover.
Though the definition of ULIPs corresponds more with insurance than an investment option, the regulations governing their working have paved the way for a product that today provides systematic capital appreciation over a long term. Premium payment ease, low costs, tax benefits, and free switching from one fund to another to maximise returns as per market conditions, have resulted in ULIPs being looked upon as investment vehicles that fetch high returns, comparable to other financial instruments such as mutual funds (MFs), besides guaranteeing insurance cover free of any additional charges.
(The writer is Head of Life Insurance, Policybazaar.com)