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New Age ULIPs: How Have ULIPs Evolved?

New Age ULIPs: How Have ULIPs Evolved?

New Age ULIPs: How Have ULIPs Evolved?

The first ULIPs saw the light of the day about two decades ago in 2001. However, the product was aggressively popularized only since 2005, after private life insurers forayed into the product. Unit linked insurance plans always had great potential, but one simple drawback – awareness.

A Contemporary Investment Option

Except the operational factors ULIPs never asked for a significant change in investor behaviour towards an insurance plan. Before ULIPs life insurers have always been offering long-term investment plans with guaranteed returns coming 20-30 years later.

ULIPs are also long-term investments but provide far more flexibility when it comes to investment. However, the lack of awareness of the long-term benefits of ULIPs among the new investors put it in a bad light.

Another factor which contributed to the bad rapport for the investment was the initial charges of the plan. Although, the charges subsided to a nominal level after few years, the initial shock due to high expense ratio was enough to irk the investors.

Being a unique investment product, it was also difficult to find a direct comparison with any other investment option. However, with time a lot has changed with the ULIP plans.

Charges & Features of Old ULIPs

The older ULIP plans had multiple charges applied to each premium invested in the plan and to the accumulated corpus. Plus, there could be additional charges for various service requests like withdrawals and switches, depending on the plan. The common charges applicable to every ULIP plan:

  • Premium allocation charge

    This charge is applicable to each invested premium and ranged between 3-9% of the premium amount.

  • Policy administration charge

    Applied on the total corpus, this is usually less than 2% p.a. but may be capped at a specific amount.

  • Fund management charges (FMC)

    This charge is also applicable on the corpus; ranges between 1% to 1.35% for active policies depending on the type of fund)

  • Mortality charge

    Applied for the life cover amount (Sum at Risk), based on your age and other factors influencing the life insurance premium.

The mortality charges in a ULIP plan is not applicable based on the life cover sum assured of the plan. Instead, the charge will consider only the Sum at Risk value for the total cost. The sum at risk (SAR) is the difference between your accumulated corpus and higher of the following two numbers:

  • Policy sum assured
  • 105% of the total premiums paid

You can check your policy document for the details of SAR calculation, as it may vary depending on the benefit options and policy features.

ULIP plans have always been goal-oriented investment plans. If you have a long-term goal, ULIP would be your one-stop investment plan to secure it. The earliest features of ULIP plans included:

  • Life cover for the policyholder
  • Goal protection option under child plans
  • Option to switch between different funds
  • Option to withdraw funds from the plan partially after the lock-in period

Charges & Features of Modern ULIP Plans

Modern ULIPs are not only flexible with investments, they offer more features and benefits at a lower expense. The expenses in the new ULIP plan Invest 4G from Canara HSBC OBC Life Insurance:

  • Premium Allocation Charge: Nil
  • Policy Administration Charge: Nil
  • Fund Management Charge: Ranging from 0.8% to 1.35% depending on the type of unit-linked fund selected for investment
  • Mortality charge: As per the age of the policyholder and the SAR
  • Partial Withdrawal Charges: Nil
  • Switches Charges: Nil

Modern ULIP plans including Invest 4G, offer far more flexible options when it comes to being useful to investors. Few of the unique and beneficial features of the plans are as follows:

1. Automatic Portfolio Management Options

If you are keen on building wealth, automating your investments and asset allocation should be your priority. While investment automation is simple with bank mandate, asset allocation requires consistent effort from the funds.

New age ULIP plans offer multiple asset allocation options to maintain your portfolio risk and safeguard your returns from the equity funds. Some of the most useful portfolio management strategies are:

  • Systematic Transfer Option

    Helps you to invest in equity funds with SIPs even when you invest in the plan only once in the year.

  • Return Protection Option

    As your equity portfolio grows this option ensures that you secure your increasing wealth by liquidating and moving the gains to a safer fund. You will need to provide a threshold of gains. Once your portfolio reaches the threshold return the insurer will book the gains.

    Your overall portfolio risk will continue to drop as your portfolio ages in this strategy.

  • Auto Funds Rebalancing

    This strategy ensures that your portfolio risk remains consistent throughout the investment period. You define the ratio of investing in equity and debt fund which the plan will maintain by rebalancing the assets based on performance.

  • Safety Switch Option

    This option works in the last four policy years, and systematically moves all your equity holding to liquid fund. You can use this strategy in combination with any of the three options above.

2. Bonus Additions for Long-Term Investors

Invest 4G plan offers bonus additions for safe investors in the plan. If you keep on investing for a long period of time, usually more than 5 years, the insurer adds bonus units to your portfolio. The longer you invest the more bonus units you receive.

If you are a safe investor, bonus units boost the compounded growth of your portfolio, helping you achieve your goal faster.

3. Systematic Withdrawal Option

The plan also offers a systematic withdrawal option to the investors, which you can use to start a monthly income. This benefit is especially useful if you are using the ULIP plans to save for your retirement goal.

Since all withdrawals from ULIPs after the lock-in period of five years are tax-free, you can create a tax-free pension for yourself.

4. Life-Time Coverage

Life-time coverage is another latest addition to the ULIP features. Under this option, you can continue your ULIP plan till the age of 100. This option is great if you want to build a tax-free pension for life.

These features make ULIP plans the best investment option for retirement savings. However, the only catch with ULIPs is that you cannot invest more than 10% of the base sum assured due to tax laws. Thus, you will need to use the ULIP plan as a supplementary investment plan for your retirement.

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