In my last column, we commenced a discussion on how the Unit Linked Insurance Plan (ULIP) was seen to be the preference of several investors in a recent Survey by a life insurance company. It indicated that that two out of every three respondents in the survey seemed inclined to consider investing in ULIPs in the coming year.
I also mentioned at the end of the last column that I am far from surprised since I, for one, am never skeptical about the utility of any financial product. It is always the case of identifying the temperament of investors and those that would do better with one product than the other.
We also addressed some of the myths surrounding ULIPs and reviewed a case where a ULIP might have been a more appropriate product given the temperament of the investor. Compulsive spenders are another category who could definitely benefit from investing in a ULIP rather than a more liquid product that they can easily redeem and spend the proceeds.
As one who has more than an academic interest in the behavioural patterns of investors, my conclusion is that ULIPs usually inculcate a forced sense of discipline into those investors who are best suited for this product. More importantly, it also ensures that they do not barter their long term goals and objectives to fulfill their near term needs and desires. And that to my mind, is the deal clincher.
The USP of a ULIP, and this seems to have featured prominently in the above mentioned survey, is the flexibility this instrument offers an investor to switch between equity and debt, depending on market conditions, without incurring any tax liability on the switch in and switch out. With a well qualified advisor, whose asset allocation skills are superior, this product can be used optimally to enhance returns or protection, depending on the investor’s objective.
Alongside, a ULIP also offers a Life Cover benefit which can be flexed if one wishes, on reaching different life-cycle stage milestones. Another deal sweetener is that ULIP premiums are eligible for a tax deduction under Section 80C. Furthermore, the returns received on maturity are still exempt from income tax under Section 10 (10D) of the Income-tax Act upto a specified threshold limit which favours retail investors. These are multiple benefits that an ULIP offers. It is worth noting here though that with a ULIP, the objective should be to stay invested over a long time horizon and not the minimum mandatory five-year lock-in period.
With a dynamic asset allocation mix that gets periodically fine-tuned based on a long term goal or objective, the returns over a 10-year plus period can be quite impressive. This is primarily because longer term tenures give enough time for the ULIP’s front-loaded costs to be absorbed and lower costs to set in, thus allowing the power of compounding to kick in.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com