ULIPs are one of the most promising investments, especially for beginners. They offer multiple benefits including tax deductions/ exemptions under various sections of the Income Tax Act. ULIPs are a good balance between calculated risks and secured returns. However, just like any other investment or policy, they need to be understood in detail before you make a decision to invest in them. Here’s a primer on how to understand the benefits of ULIP that you need to go through while selecting one.
Firstly, what is a ULIP? ULIPs are life insurance plans which come with an investment component as well. A ULIP investment divides its premium between life insurance cover and funds. These funds are selected as per your risk appetite. You can go for debt funds, equity funds, or balanced funds as per your choice.
What is a benefit illustration? More often than not, we buy life insurance plans and investments through agents to make the process convenient. However, having the agent as an intermediary also carries the risk of the agent not giving the complete required information. This is why, the IRDAI (Insurance Regulatory and Development Authority of India) has made it mandatory for each insurance company to provide potential customers of ULIPs with benefit illustrations. A benefit illustration gives the customer an idea of how premium will be invested, what charges will be incurred, and how your investment can grow. A benefit illustration also shows the surrender or maturity value at different points of the ULIP term. All of this will be drawn out keeping your age, premium value, and term in mind. Here are a few tips for reading the benefit illustration.
Gross investment returns are calculated at 4% and 8% growth rates as a mandate, and are shown in separate columns alongside each other. However, actual returns will depend on asset classes.
One column will have your name, your age, etc. along with premium amount, ULIP investment term, maturity, and fund allocation.
The breakup of premium is in multiple columns. The first column shows premium, the second shows premium allocation charges, the next shows available amount for investment. There are columns for other charges such as fund management charges, policy administration charges, etc.
Returns are classified into guaranteed returns and variable returns for better understanding.
The final three columns are key for decision-making. They show fund value, death benefit, and surrender value at the end of every year of the ULIP investment. If the benefit illustration is for, say, 20 years, these columns will show benefits of ULIP after 20 consecutive years. This helps you make a decision based on future goals like child’s education, buying a house, etc.
The yield after application of charges is shown in the ‘Net Yield’ column. It shows separate Net Yields for growth rates of 4% and 8%. The Net Yield is basically RIY (Reduction in Yield) or charges subtracted from growth rate. For example, if the overall charges amount to 1.75% at a growth rate of 8%, the Net Yield is 6.25% and the RIY is 1.75%.
By this logic, generally, higher the RIY, lower the Net Yield, and lower the returns.
Note that insurance companies are permitted to not take mortality charges into account for calculating this value. Ideally, they should illustrate values with and without mortality charges.
Conclusion: Benefit illustrations are true transparency checks for ULIPs apart from showing the actual benefits of ULIP. Make sure you look at multiple of those before choosing a ULIP to invest in. A great option that you can consider for your next ULIP is the Invest 4G plan from Canara HSBC Oriental Bank of Commerce Life Insurance.
Invest 4G Canara HSBC Oriental Bank of Commerce Life Insurance’s Invest 4G plan will save you from the inconvenience of multiple life insurance plans and multiple investments. It offers 7 different funds with 4 different portfolio strategies to meticulously invest your savings in, along with a comprehensive life cover. It also boosts your savings with Loyalty Additions and Wealth Boosters. You can also avail the option of Return of Mortality Charge. You have the option of switching funds in order to explore possibilities of better returns, and even partially withdrawing them for contingencies.