Should you invest in Unit Link Insurance Plans

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ULIP Plan Comparison
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Should you invest in Unit Link Insurance Plans
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• A few months back I attended a dinner party at an
  ex-colleagues place in Gurgaon. One of the
  invitees to the party was a chartered accountant
  cum financial planner, who runs a very successful
  tax and financial advisory practice in the
  National Capital Region. As I was chatting with
  my friends and ex-colleagues on a variety of
  topics, related mostly to capital market and
  investments, this gentleman said that while
  mutual funds are good investments, Unit Linked
  Insurance Plans, popularly known as ULIPs, do not
  deserve the flak they receive in the investment
  community. In fact, he said that, ULIPs can be
  very good investments with the added benefit of
  giving life insurance cover to the investor. He
  admitted that, ULIPs earned a bad name for
  itself, 8 9 years back, but with revised
  Insurance Regulatory and Development Authority
  (IRDA) regulations, ULIPs have much lower costs
  and in the long term can give as good returns as
  mutual funds, if you factor in the benefit of the
  life insurance cover as well.
• One of the criticisms which ULIPs faced was that,
  even though they were sold as combined life
  insurance and investment plans, the life covers
  of ULIPs in the earlier period were simply not
  sufficient to meet the needs of the insured in
  the event of an untimely death.

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• The minimum life cover as a ratio of annual
  premium was raised substantially under the new
  regulations. Whether the increased life cover
  under the new regulations is now sufficient to
  meet the needs of the insured is something that
  needs to be examined, but there is no doubt that
  this was a good development over what existed
  earlier.
• These caps are in the form of maximum net
  reduction in yield due to the ULIP costs. We will
  discuss more about these caps later in this post,
  but suffices to say at this stage, that with the
  cap on charges, the cost structure of ULIPs have
  been substantially rationalized. With lower costs
  the returns of ULIP policies have improved
  substantially. Whether the new regulations have
  made ULIPs as attractive as mutual funds is
  something we will examine later, but again there
  is no doubt that, ULIPs are now much better
  investments.
• I mean non term traditional life insurance
  savings plans. In these plans, the insured gets
  sum assured in the event of an unfortunate death.
  If the insured survives the policy term, he or
  she gets the sum assured plus bonus and some
  guaranteed additions.

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• The difference between these plans and ULIPs are
  that, these traditional plans are not market
  linked unlike ULIPs. In the traditional non term
  insurance plans, if the insured survives the
  policy term, the sum assured is roughly equal to
  the premiums paid by the insured over the policy
  term. Therefore, if the insured survives the
  policy term, he or she gets back the premium he
  or she would have paid to insurer over the policy
  term and some extra in terms of bonus and other
  additions, if applicable.
• How does ULIP Plan Comparison compare to
  traditional life insurance savings plan? Let us
  look at returns in the first five years of a ULIP
  versus a traditional life insurance savings plan.
  Firstly, we have to recognize that, ULIPs are
  market linked investments, whereas traditional
  life insurance savings plans are not market
  linked. Market linked investments are more risky
  than non market linked investments. However, we
  have discussed a number of times in our blog
  that, equity as an asset class, can beat
  inflation and outperforms other asset classes
  over the long term. Therefore, for younger
  investors, it makes sense to invest in equities
  for their long term goals.

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