Why you should invest in ULIPs now

They were once the most bought financial product. Then Ulips became the most reviled investment, forcing a string of reformatory measures. Now these investment-cum-insurance plans have changed once again to become a low-cost investment option. In fact, some of the Ulips introduced in recent months are cheaper than the direct plans of mutual funds. 

We won't be surprised if this evokes an angry response from readers. Ulip became a four-letter word due to the high charges levied by insurance companies and rampant mis-selling by distributors. In some cases, the charges were as high as 80% of the first year's premium. Distributors lured gullible investors by not revealing the high charges and showcasing only the returns offered by the market-linked product. 

The Insurance Regulatory and Development Authority (Irda) clamped down in 2010, capping the annualised charges of Ulips at 2.25% for the first 10 years of holding. The charges were fixed at this rate because it was the average cost charged by competing products such as mutual funds. With no incentive left for distributors, Ulip sales plunged. 

In recent months, insurance companies have sweetened the deal for investors by reducing the charges even further. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn't have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don't have lower charges but compensate long-term investors with 'loyalty additions'. 

But the Click2Invest plan from HDFC Life is a game changer. The only charge it levies is an annual fund management fee of 1.35% of the corpus value. There is also a mortality charge but that is for the life cover offered to the policyholder. The low charges make the Click2invest plan cheaper than even the direct plan of a diversified equity fund. For instance, the direct plan of the largest equity scheme, HDFC Equity Fund, charges an expense ratio of 1.5% per year. 

Some readers may pooh-pooh the idea of saving a sliver on costs. After all, a 0.15% saving on costs makes a difference of only `150 on an investment of Rs 1 lakh. While this may seem small, the difference in the cost can balloon into substantial savings in the long term. 

Shed your aversion to Ulips 

This transformation of Ulips from a costly bundled product to a low-cost option has led to a change of heart among financial planners as well. For long, they have advised clients to keep insurance and investment separate. Indeed, it is time to get rid of the historical aversion to Ulips and look at them through the prism of lower charges. This will not be easy because a lot of investors have been scarred by their experience with Ulips. Many have lost ously, the mortality charges are higher when it comes to such plans.

Though Ulips offer a cover to policyholders, the benefit may be a drag for those who are interested purely in investment. The low-cost Ulips are, therefore, Type I plans that will pay either the fund value or the sum assured. Here's how it will work. Suppose a person buys a Ulip with a Rs 1 lakh premium for 20 years.

The plan will give him a cover of Rs 10 lakh (10 times the annual premium), but the insurance company will charge mortality premium for only Rs 9 lakh since the total risk for the company is Rs 9 lakh. With every annual payment of the premium, the risk of the company will come down, reducing the mortality charge. When the fund value of the Ulip exceeds the sum assured, the plan will stop deducting mortality charges and the entire premium will go into investment. 

Another way to reduce the impact of mortality charges is to buy the policy in the name of your spouse or child. Income from investments made in the name of a spouse or a child is subject to clubbing provisions, but since the maturity proceeds from Ulips are tax-free, you don't have to worry about that. You can also go for single premium Ulips, with an insurance cover of only 1.25 times the premium. However, the maturity proceeds of such a plan will not be covered under Section 10 (10D) and will be taxable in your hand. 

[Source: http://timesofindia.indiatimes.com/business/india-business/Why-you-should-invest-in-Ulips-now/articleshow/44458163.cms]

What are the advantages and disadvantages of investing in ULIPS?

A unit Linked Insurance Plan (ULIP) is nothing but an investment product that offers you the benefit of investment in the capital markets along with insurance. It's a combination that very few instruments can offer.

Take a look at some of the advantages and disadvantages of an ULIP. An advantage of an ULIP One of the advantages of the ULIP is that it can offer you superior returns depending on the fund that you invest in.

For example, if the fund you have chosen has heavily invested in the capital markets, chances are that if the stock markets do well, your fund may also do well. The other advantage of an ULIP is that it provides insurance cover as well.

The insurance cover may not be as great as a term plan, but, it should be good enough. The above are the two major advantages of a ULIP NAV. A disadvantage of an ULIP One of the biggest disadvantages of an ULIP is that the returns cannot be guaranteed.

For example, if you have chosen an ULIP that invests bulk of the money in equities and the shares are not doing well, chances of losing money cannot be ruled out. This is one of the biggest risks and perhaps the only disadvantage that one can see from an ULIP. Other features of an ULIP in an ULIP one can make partial withdrawals.

This means if you have invested a sum of Rs 10,000, it is possible to withdraw Rs 5000 from the same. Also, in case you are not satisfied with the policy you can ask for a withdrawal within 15 days from receipt of the policy. Another feature of the ULIP is that you can switch from one fund to another.

However, the feature should be available for a successful switchover. Conclusion ULIPs offer you a combination of insurance and returns. If you have invested in an ULIP that parks substantial money in equities, there is an element of risk in the product. Of course, if capital markets do well your fund could generate a superior return as well.

[Source: http://www.goodreturns.in/classroom/2014/10/what-are-the-advantages-disadvantages-investing-ulips-309567.html]