Every individual has a dream which he / she aims to fulfil over the long term. Some of these are tangible and need a systematic savings approach.
As a parent, your child is usually at the centre of your financial decisions. You would typically start investing when your child is young, thereby preparing yourself financially for the critical milestones in your child’s life such as fulfilling her dream of education in a prestigious institution, sending her abroad for higher studies, etc. In such a scenario, you would always want to look for an investment instrument that gets you decent returns over the long term along with some assurance.
Going by the currently falling interest rates, it may be wise to look at options that give you potentially higher returns along with a safety net which protects you in case life doesn’t turn out the way you planned.
There are various financial savings instruments which enable you to invest regularly and build a corpus over the long term. However, with most instruments the corpus will be built only if the investment continues uninterrupted. Given life’s unpredictability, you need to be prepared to face all situations. Unit Linked insurance plans (ULIPs) work well in this context. They offer you the benefit of protection along with savings over the long-term. Our research shows that ULIPs are a popular instrument among consumers, especially those who are willing to commit to a long-term wealth creation plan.
What is a ULIP?
It is a savings and investment plan combined with insurance which gives you market exposure thereby offering potentially high returns. A ULIP offers you financial protection in the form of a sum assured (life cover) which acts as a safety net for your family in case something were to happen to you before the date of maturity of the policy. Equities as an asset class offer potentially superior returns and ULIPs give you the choice to invest in funds you want. Additionally, you also get tax benefits u/s 80C of the Income Tax Act and the maturity amount is tax-free u/s 10(10)D of the Income Tax Act.
How does a ULIP work?
First of all remember – it is a long-term product with a time horizon of 10 years and more. Your premium gets allocated into a fund or multiple funds of your choice. The funds are spread across three categories – equity oriented, debt oriented and balanced of the two. Based on your risk taking ability, you can choose one or more funds. When you pay premiums regularly for the entire term of the policy, it works like a SIP where you benefit from market movements and also from the power of compounding. This enables building of a substantial corpus over the long-term. Historically, ULIPs have given decent returns on a longer term. Depending on market movements and / or your changing risk appetite, you can also change the funds in which you have invested. This flexibility is called switch. You get free switches every year and once you have exhausted your free switches, you can switch for a minimal fee. The number of switches in a year is unlimited. You also get to make partial withdrawals, in case you face a financial emergency, without forfeiting your life cover.
Can you increase your premium in case you have surplus funds?
You can use a facility called top-up which allows you to deposit over and above the amount that you pay as premium, thereby further adding up to your savings kitty. This facility can be used to park any windfall gains or increments without having to buy a new policy.
What are the charges?
There are a few charges such as premium allocation, policy administration charge, fund management charge and cost of insurance (mortality) charge. Given the fact that life insurance products are long-term in nature, over the long-term the charges have minimal impact on your savings. You can also find ULIPs that will only have fund management charge for investment and mortality charge for insurance cover.
Is there a lock-in period?
ULIPs have a 5 year lock-in period during which one cannot make any withdrawal. After the lock-in period is over, you can withdraw money without any penalty.
Who should buy a ULIP?
Any individual who is looking for fulfilment of a long-term financial goal. The risk reward profile of funds is clearly specified in the product brochures. Go for funds that suit your risk taking ability. There is no minimum age – if you are above 18 and you want to save for the long-term with the benefits of market linked returns, you can purchase ULIPs.
Chinmay Bade, Vice President - Products, HDFC Life