The technology employed by insurance companies is called ‘Unlimited Liability Insurance’ or
simply, ‘ULIP’ which provides coverage for unlimited losses at a much cheaper rate than
traditional insurance plans. ULIP also provides coverage of a wide range of risks that
traditional insurance doesn’t cover such as cyber-attacks, policyholder disputes and more.
According to a CNBC article titled "How ULIPs are Revolutionising the Indian Exchanges",
Experts believe that ULIPs have the potential to make the insurance industry in India a
whole lot more efficient and cheaper than traditional plans. But how?
To understand that, we need to understand what ULIPs are. This article provides an in-depth outline for all the different types of ULIP policies on offer, as well as how they are rated. It also has information about how these deals can be tailored to suit your financial needs and lifestyle. These tips will help you make an informed decision about which type of policy is best for you. In this article all your doubts about ULIPs shall be clear.
A ULIP is a combination of ‘Unit Linked Insurance Policy’ and ‘Equity Linked Plan’. A Unit
linked insurance policy (ULIP) is a fixed term insurance plan that combines life cover and
savings in the form of units, which are units invested in equity, debt or hybrid funds.
The ULIP is issued by Life insurance companies that invest the premium amount collected in the policy holder's name into different schemes like equity schemes, debt schemes or a combination of both. The returns from these investments are also paid to the policy holder as bonuses on top of his/her assured life cover. ULIPs also guarantee faster policy reinstatement in case of cancellation, unlike traditional insurance plans which often take months to reinstate the policy due to paperwork. The author also mentions that another benefit is the freedom of choosing your own insurer due to free market competition for ULIPs where other players can enter the market easily.
Basically, it's a type of life insurance which protects the policy holder's family in the event that he or she dies prematurely or due to an accidental injury. It basically acts like a guarantee, whereby if a policy-holder dies before their term ends, the insurer will pay off the beneficiaries of the policy, even if the beneficiary contract has already expired.
ULIPs are offered by insurers who consider themselves experts in financial planning like
Reliance General Insurance, Transport Corp of India and ICICI Prudential Life Insurance
Company among others. Under this plan, the insurer invests your money in PF or Direct
Recourse System mutual funds or stocks. In case of Direct Recourse System, the invested
money is used to buy units of the mutual fund scheme. If the returns are low, the investor
loses money because there is no insurance cover. In the case of a regular life insurance
plan, if returns are low, you can at least enjoy the maturity benefit and pay very little
for your cover.
The policyholder has two options while selecting a ULIP plan. The first is to invest a part or whole of the premium amount into equity or debt schemes, and the second is to invest a part or whole of the premium amount for life cover only. A ULIP is a combination of an equity-linked savings plan and life insurance policy. ULIPs typically come in 2 forms:
1. where the insurance part of the policy is in the form of an ATOL (accidental death and total and permanent disability) or a TPD (total and permanent disability) rider in addition to a term assurance, or
2. where the policyholder pays for both types of coverages. ULIPs were introduced by Indian insurers in 2002 as an innovative product with benefits such as tax-free returns on investment, guaranteed income, protection against volatility, etc. This was an attractive proposition and ULIPs soon became the most profitable product of an insurance company. If invested in both, then the return on investments will be split between them in equal proportions over a number of years. Alternatively, some insurers offer ULIPs where your premiums are invested in fixed deposits with banks. Though return on your investment is higher, again it depends on how well the bank's deposits have performed in recent times.
ULIPs are classified as either permanent or limited term policies.
Permanent ULIPs (PL)
They have fixed premium rates for continuous payment to the policy-holder's heirs unless certain conditions are met. ULIPs with a fixed premium are also referred to as permanent ULIPs. The premium amount varies depending on the conditions of the policy, and can be changed only if the conditions change.
Limited-term policies (LT)
They also have a fixed premium rate paid out at the end of their specified term, but this time it is paid to the policyholder's beneficiaries once they are no longer alive or no longer qualifies as beneficiaries due to reasons like death or disability. The policy will be renewed, providing that there is still enough money available in their funds for renewal. The amount that is paid out can vary depending on how much time has passed since the original policy was issued and who is qualified as beneficiary. The premium amount varies depending on the conditions of the policy and can be changed only if the conditions change.
The cost of a ULIP depends on the investment option. The insurance component is relatively
cheaper. For example, in Reliance General's ULIP, the premium for Rs 10 lakh cover for a 35-
year-old female is Rs 94,500 and the term insurance component is Rs 20,000 per year or Rs
5,000 per month. The investment option she chooses will determine her total cost.
According to one estimate, only up to 10% of investors opt for ULIPs. This is because they are expensive. Usually, the total lump sum amount required to buy a unit of an ULIP is around Rs 10 lakh. On the other hand, you can buy regular term insurance with a premium of Rs 30-40,000 and enjoy maturity benefits if your age gap with the policy's validity is more than 10 years. In case of a pure equity plan like ICICI Pru's ULIP, the premium for Rs 10 lakh cover for an 18-year-old male is Rs 36,000 and the insurance component is Rs 15,000 per year or Rs 4,500 per month. The investment option he chooses will determine his total cost.
The advantage of these plans is that you get higher return on investments than other insurance products or a savings bank account. However, you need to be careful that the investment option in which premiums are put into has performed well in recent times. The efficacy of ULIP has been demonstrated by insurance companies who have seen the difference it has made in their bottom line. For example, in 2014, Old Mutual Insurance came up with a new product called the ‘Old Mutual Lifetime’. The product provided basic coverage apart from some additional features such as General Injuries, Accidental Death and Dismemberment, Travel Assistance, Critical Illness and many other benefits typical of ULIPs. The article concluded that this product is a hit as it has attracted about 3.2 million customers all over India making Old Mutual the largest insurance company in the country. The interesting part about ULIPs is that not all insurers offer it despite the lack of technology for implementing them to be cost-effective. For ULIPs with mutual fund investments, your cost depends on how well the mutual fund scheme has performed in recent years. The biggest advantage of ULIPs is that investment risk is borne by the insurer and not by you, since you need to pay just premiums for your life cover. On the other hand, if you invest in a regular life insurance plan, you will bear the full risk of your investments because you need to pay a higher premium when there is no cover. Also if you're avoiding some tax risks. The tax-free savings part of ULIPs isn't all bad! Although tax should be a big priority, ULIPs also give off some decent returns without being taxed as well. This can be a big advantage when it comes to tax-free savings in the long run.
What are you planning to buy now? Quotes? A policy? Regardless of what it is, ULIPs have some
pretty big downsides. So if you're relying on them, take a moment to consider these:
● Your options have decreased considerably in number. Some plans may only have one or two different options for each individual state or province.
● Your payout is decreasing by the second. The rate at which your tax-free savings are decreasing is growing exponentially each time you add on to it. If you're planning to purchase a big home or even a retirement home, it might not be enough to cover what you need.
● You need to pay a lot of attention to your ULIP. Tying your money up in an insurance policy means that you won't have access to it if something comes up in the future and needs urgent attention.
● If there's any chance of your policy ending up being less than it is today and you can't rollover the money into something else that you know will work, you might as well just put your money in a savings account somewhere.
● You're messing with the risk-reward ratio. If you're in an area with only one or two options and they are constantly changing, if there's even a small chance that one drops out, does it make sense to tie yourself to one place?
● You're unsure of how much money you'll have access too. Tying your money up in a place where you don't have access to it right away is a surefire way to cause some problems if something comes up. It might mean that when you go to buy your home you won't have the money to do so.
● If you're just putting all your money into one plan and wondering when you'll get paid out, it's better to have it in lots of different places. If a big storm hits in your area and the area has a lot of damage, or if something unexpected happens at home, or if something unexpected happens at work and you need the money for it, you will have more options available to you.
● You don't have many other choices. If you only have one or two plans available to you, your U insurance is going to be sort of useless in the end. If there's only one option, or if they aren't offering you a great deal and there isn't room for negotiation, you'll have to think again before signing on with them.
The big question is whether ULIPs are good or bad for you? And for whom? Understandably, there are no definitive answers because it depends on your needs and risk appetite. But beware, factors like time and money change with no prior warning. Of course this shouldn’t stop you from getting a ULIP, always do a thorough risk assessment before you proceed with your plan.