ULIP’s were all the rage between 2005 and 2009. Bankers and Insurance Advisors cashed in on the soaring equity indices and recommended ULIP’s by the dozen, raising questions on whether customer interests were being kept at heart. Ironically, once ULIP commissions were rationalised by the IRDA in 2009, their share within the overall Life Insurance have only fallen in the years that followed – only serving to validate this suspicion!
ULIP’s have actually come a long way in the past few years, and are not quite the bane they used to be prior to 2009 – when anything from 20 to 70 per cent of your first-year premiums was slashed away as ‘distribution costs’ (read: commissions) and, like the proverbial lame horse, your money didn’t quite stand a chance to race ahead! According to research portal Morningstar, 5 years returns from large-cap ULIP funds have averaged a neat 16% plus per annum as of 2022. Here are the top three (often ignored) steps that ULIP investors can take, to optimise their experience with the product.
Opt for a sensible balance between the death benefit and investment
Most ULIP investors are oblivious to the fact that a certain number of their investment units are cancelled each year in lieu of the mortality costs associated with providing them with a death benefit. IRDAI norms currently stipulate that the minimum sum assured associated with a ULIP should be ten times the annual premium – for instance, if you’re committing Rs. 5 lakhs per annum to your ULIP, it necessarily must carry a sum assured of Rs. 50 lakhs at the very least. Anything from Rs. 5,000 to Rs. 20,000 per annum (depending upon one’s age, lifestyle and health indicators) would be deducted from the fund value each year in lieu of this death benefit.
Unfortunately, many ULIP investors view this mortality cost deduction as a negative – whereas, ironically, it’s the most important feature of the policy in reality. Life Insurance is primarily designed to be a risk transfer tool, and any savings or investment element needs to be viewed as a secondary benefit to this feature – not the other way around. For best results, investors must strike a sensible balance between their sum assured value and their investment allocation. For instance, if Rs. 1 Crore is an optimal death benefit amount for you keeping your life stage and family goals in mind, you could consider increasing the sum assured amount, even at the cost of a smaller allocation to your investment funds.
Decide your Asset Allocation carefully
Far too many ULIP investors remain blissfully unaware of where their money is really going! Each ULIP will typically give you the option to invest in a couple of different types of equity funds, a fixed-income fund, and a cash fund. The vast majority of Life Insurance agents are (unfortunately) no more than salespeople, and pay scant attention to your asset allocation and whether it’s in sync with your life stage and goals. Oftentimes, clients look back at their policy statements a few years later and baulk at the fact that their portfolios hardly grew, whereas markets soared in the same period. Upon closer inspection, it turned out that they were unknowingly parked 100 per cent into fixed-income funds during the time!
If you’re young and have a long-term investment horizon, there’s no reason why you shouldn’t be open to having more volatility in your portfolio in order to enhance your future scope for returns. Stay alert to your fund selection, in order to avoid inadvertently making investments that are out of sync with your objectives. If you’re confused about your ideal asset allocation, the services of a qualified Financial Planner could come in handy.
Rebalance your Portfolio Periodically
Most ULIP’s allow a certain number of free ‘switched’ each year, and you should ideally avail these on your policy anniversary date to bring your portfolio back in sync with your ideal asset allocation. For instance, you may have decided that an 80:20 allocation between a large-cap fund and a corporate bond fund is what suits you best, but an equity market rally may have moved you to a 90:10 allocation a year hence. In such a scenario, it would make sense for you to switch 10 per cent of your portfolio into the corporate bond fund and take your portfolio back to its planned division between equity and debt.
To sum up, before you sign up for a ULIP, make sure you assess fund performances, fund manager pedigree, as well as all associated costs. Better yet, avoid ULIP’s altogether and just combine term insurance with a portfolio of top-performing mutual funds instead.