Are ULIPs suitable for your investment requirements?

ULIPs in the current avatar are a far better bet compared to traditional plans for a variety of reasons. Let me list a few of them below and suggest why they may be suitable to a lot of people. I will also attempt to compare some of the features with traditional plans and hence the relative suitability for individuals.

·         Risk Appetite: If the person has ZERO risk appetite and is looking for low risk investments, then traditional plans are a better bet. Not that you will know the returns in advance but traditional plans do offer a certain amount of returns historically. Now if you are open to even low or moderate levels of risks, ULIPs are better as you can park your funds in debt funds and secure stable returns. If you see markets performing well you can move your money to more aggressive funds to reap the benefits.

·         ULIPs, like most life insurance products are long term products: ULIPs have a 5 year lock-in period while traditional life insurance plans have a lock-in period of 3 years. There is a positive catch in favour of ULIPs though in this. In case you decide to exit the policy after 5 years what your get in a ULIP will be far greater than what you get in a traditional plan. In traditional plans, you get back only a small portion of the premiums you have paid. In ULIPs you may even stand to make an investment gain if the markets have performed well.

·         Flexibility: Here is where ULIPs score far better than traditional plans. A little related to the point which I mentioned above in “flexibility”, with ULIPs you can decide where your money should be invested or go by the investment strategy of the company provided default option. In uncertain times you can stick to debt funds with low risk and move to growth oriented funds when you see the markets perform better. With a 10 year horizon, you will get enough opportunities to make these small adjustments and make money.

·         Surrender Charges: I wish to highlight this separately as we often find ourselves stuck with a plan and not having the resources to continue with it. The surrender charges will kill you in traditional plans, almost to the extent of banging your head against the wall! You will curse yourself if you buy a traditional Saving plans in a hurry to save tax or because you just felt obliged to the person selling you the plan. Later on when you cannot afford to pay the regular premiums, you stand to lose even the money which you have already invested. In traditional plans you will get only a small portion of the money you have invested in case you exit. With ULIPs, you may find surrender charges to be even zero after a few years. So you may be able to exit even with a profit!

·         Transparency: This is again where ULIPs score very heavily. You know exactly what charges have been levied and how you current account stands. With traditional plans, you know nothing – no information is shared with you. It’s a bit like receiving a bill from 2 hotels – one just mentions the high amount you are charged and the other offers a lower bill but has a complete split of all the charges. Since you now see the complete split of the bill, you tend to fret over the different charges not realising that they are much lower than what the other hotel has charged. But since the high bill amount had no splits you just shrug it off and pay the amount.

Overall, if a person has an investment horizon of 10 years, ULIPs are much better than traditional plans.