The ULIP guidelines have changed. The new guidelines aim at enhancing transparency, enlarging the insurance cover in a consistent manner and adhering to the medium as well as long-term investment characteristics of insurance products.

But when compared with traditional insurance plans, ULIPs would easily score on all fronts. Considering the benefits, ULIPs should not be just bought or sold as an insurance plan. In fact they can actually be a one-stop solution for financial planning as they hold substantial potential to provide you with high returns, anytime liquidity, flexible term and flexible insurance cover with 100% tax free returns. 

Here’s a comparison between traditional and ULIP insurance products

Charges
Try comparing the surrender value of a traditional insurance product and a ULIP at the end of three years and you’d be surprised. Lets say you’ve paid a premium of Rs. 30,000 per annum on a traditional risk cover for three years. Now at the end of three years you would not even get Rs 45,000 as surrender value. That huge deduction from what you have paid as premia for the three years is nothing but charges that are not transparent on traditional insurance plans.

On the contrary in case of ULIPs the initial charges vary from company to company but are comparatively much lower. In case of ICICI Prudential LifeTime Super the charges are 20%, 7.50% and 4% for the first three years on fresh premium installments while in case of HDFC Standard Life Unit-Linked Endowment Plan Plus they are 30%, 30% and 1%. Besides, the charges are slightly lower as the premium amount increases.

If you surrender a ULIP plan after 3 years you tend to get back almost 100% of what you have paid even if it has been invested in a debt fund. For instance if you consider a growth of 6%, ICICI Pru’s LifeTime Super would get you Rs 85000/- at the end of three years and at a growth rate of 10% it would give you Rs 91000. Similarly, HDFC’s Unit-Linked Endowment Plan Plus would get you Rs 76000/-

The surrender value can be more if you invest in an Equity Fund as historically the long term equity returns tend to be in the range of 12% to 20%. And if you switch actively between equity and debt as per market conditions, you can make a killing. That said note that you must select a ULIP that has comparatively reasonable charges when compared with its peer products offering similar features.

(Charges are charged towards medicals done, actuarial fees, policy document stamp duty, agents commission etc.)

Commitment
In case of traditional plans you need to pay premiums for a fixed term of 25 or 35 years. And in case you happen to skip premia payment even one year, your policy would lapse. In ULIPs, you have flexibility to stop paying premiums anytime after three years (subject to a minimum corpus), and the life cover and rider cover (if any) benefits continue. But then mortality charges are adjusted against your existing investment corpus.

Flexible Cover
Traditional plans do not allow you to increase your sum assured. You are required to take a new policy each time you want to increase your insurance cover. But ULIPs allow you to increase your insurance cover anytime.

Returns
As per IRDA guidelines, traditional plans have to invest atleast 85% in debt instruments (majorly G-secs) and a maximum of 15% in equities, which results in overall returns of around 6% (after deduction of expenses and other charges if any). Whereas in ULIPs, you can maximize your returns by investing upto 100% in equity or debt as per market conditions. Also most ULIPs offer, 4 free switches every year.

Liquidity
Traditional plans are highly illiquid. Only Money Back plans offer you fixed survival benefits at the end of every 4th or 5th year as per the plan features.  In ULIPs, after 5 years you can make as many withdrawals as you want every year subject to a nominal minimum balance. Certain ULIPs also allow withdrawals between 3-5 years with a nominal exit charge.

So, what makes ULIPs a total financial planning package? 

• Potential for Superior returns by switching between Equity & Debt 
• Anytime Liquidity
• No Long Term Commitments
• Flexible Insurance Cover
• 100% Tax Free Returns on Withdrawals & Maturity

Why some insurance advisors still promote traditional plans only?
Traditional plans are simple to sell and are easily accepted by customers due to its presence all these years. ULIPs need understanding of Equity and Debt markets and in-depth knowledge of various competitive investment products and insurance plans too, to provide the best customized solution. Besides, Commissions are higher in traditional plans. Some advisors may be looking at that too!

So, your ULIP can be made to work as an……….

• Endowment Plan by not withdrawing for many years and create tax-free wealth till you retire, or
• Money-Back Plan by withdrawing as and when you require funds, or
• Children’s Plan by withdrawing funds for higher studies, marriage expenses or
• Whole-Life Plan by not withdrawing at all till 70 or 80 years of age, or
• Pension Plan by withdrawing every month after you retire. 
  
  Hence ULIP is like an all-in-one solution. 

What is the future of Insurance products?
ULIPs is the future of the insurance industry as convenience and flexibility will be preferred over the rigid terms and conditions of traditional insurance plans. Also lower returns offered by traditional plans will slowly but surely force individuals to look at unit-linked plans considering the potential for higher returns. 

Incompetent insurance agents will slowly exit in the next five years and will be replaced with professional advisors who keep themselves abreast with the latest information.

So does your advisor have it in him? If not, you deserve a thoroughbred professional who’s better equipped to handle your changing insurance needs. He is the one who’ll ensure a sound financial health for you and your family.

Please note: Some Features mentioned above may not be there in some of the ULIP plans. Before buying a ULIP, do compare the options available & select the one which suits your requirement. Some investors who feel traditional plans are suiting their requirements may surely go ahead with traditional plans. The above comparison is just a comparison and should not be considered as recommendation to buy. Do your own studies before you buy.

The author is, Jaydeep Kashikar, Director, BrainPoint Investment Centre. For any queries visit www. brainpointinv.com