Investing prudently and taking adequate life insurance is the key to meet your financial goals. ULIPs  offer an ideal avenue that allows you to invest as well as insure.

What is a ULIP?

Unit Linked Insurance Plans (ULIPs) are policies that provide a combination of a life insurance cover and investment. A ULIP has two components - the ‘protection component' and the ‘savings component’. The ‘protection component’ is the life insurance cover and the ‘savings component’ is that portion of the premium invested by the insurance company on your behalf.

ULIPs have become very popular because of their dual role of offering risk cover and wealth build-up through investments. The present guidelines regulating these policies, flexibility, liquidity, etc. make them a preferred savings-cum-investment destination.

What does a ULIP offer?

Life Cover: ULIPS offer flexible life cover as per your needs. The minimum cover is five times the first year premium. You can go for a higher cover depending on your needs.

Corpus Building: You can build your corpus for major events in your life example for your retirement, children's education, marriage etc. You can also plan for periodical withdrawals to meet your requirements.

Flexibility in risk taking: For the investment portion of the premium, each ULIP offers several 'investment funds', each with a different equity-to-debt ratio. You have to choose the fund that matches your risk appetite. It is also an ideal instrument to manage your asset allocation between debt and equity by exercising switching option from time to time. To arrive at your risk appetite, you will have to assess various parameters such as - the number of dependents, stability of present income, wealth build-up till date, your perception towards risk, etc. If your risk appetite is high, then, you can choose a fund that predominately invests in equities. If you have a marginal risk appetite, then, choose a debt-oriented fund.

Allows fund switching: You can switch from one fund to another in ULIPs. This allows you to ensure that the investment fund that you have chosen is in-sync with your prevailing risk appetite and market sentiments. Your risk capacity does not remain constant but changes to mirror your changing life situation. If the markets sentiment changes, you can switch from a debt-oriented fund to a balanced/equity oriented fund and vice versa. Most ULIPs allow 3-4 free switches a year and beyond that at a minimal cost. This becomes important as ULIP is a long term protection instrument with a minimum lock-in of three years and has surrender penalties for terminating the long term contract before the agreed duration.

Capital Guarantee: Certain ULIPs, offer you the benefit that irrespective of the market conditions prevailing at the time of maturity, you will receive a certain guaranteed amount.

This guarantee comes into effect when the value of your invested amount is below the guaranteed value. In the reverse scenario, you get the amount as per your portfolio value. In either case you get an amount which is higher of the guaranteed amount or your portfolio value. For the first time buyers into any market linked products Guaranteed Maturity Value proves to be a major comfort - protection of the downside with the upside remaining intact.

Salient features of ULIP: 

Invest as per your risk appetite
Switch from one fund to another
Capital guarantee
Allows top-ups
Premium holiday
Riders
Section 80C tax benefit
Making top-ups: You can invest additional amounts in the investment fund of your choice, without any change in the life cover.

Premium holiday: You can opt not to pay premiums for your policy for a specified period, without the policy lapsing.

Riders: Riders are additional policy benefits that help you enhance your cover and can be added with minimal charges. Examples are critical illness rider, accident death benefit.

Tax benefit: As per section 80C, the premium that you pay on your ULIP is eligible for a tax deduction up to Rs One lakh. Important things to keep in mind while choosing a ULIP:

Cost-sheet
Investing in ULIPs is accompanied by various costs (premium allocation charges, policy administration charges, fund management charges, etc.). Understand the frequency and quantum of the charges…
 Past record of insurer and experience of fund manager

It is critical to analyse the insurer’s performance since ULIPs are essentially a long-term investment. A consistent performance over the long-term should be your benchmark for selection.

Assessing fund performance

You will be allocated units upon your investment. Each fund’s unit has a value attached to it, which is unique to that fund and known as the fund's NAV i.e., Net Asset Value. Your investment value is the number of units allocated to you multiplied by the fund’s NAV. The NAV changes daily, as per the value of the fund's total investments. The NAV movement will give you a fair idea on the performance of your fund.

The NAV is calculated in the following manner:

Net Asset Value (NAV) = (Market Value of investment held by the fund +/- the expenses incurred in the purchase/sale of assets + value of Current Assets + any accrued income net of fund management charges - value of Current Liabilities- Provisions) divided by Number of outstanding units in the Fund. Because of the sheer benefits associated with ULIPs, an insurance portfolio without this type of policy is truly incomplete.

 The writer is Executive Director, Sales & Distribution, Kotak Mahindra Old Mutual Life Insurance Limited. E-mail: pankaj.desai@kotak.com