Unit-linked insurance plans finding more takers in post-pandemic market

A recent survey conducted by Bajaj Allianz Life Insurance Company, in association with NielsenIQ, highlighted the growing investor interest in unit-linked insurance plans (ULIPs) in the coming year.

According to the study, conducted amongst 499 individuals in the age bracket of 21-50 years, 92 percent of Indians preferred to invest in ULIPs post the first wave of the COVID-19 pandemic receded, perhaps a nod to the growing awareness around getting insurance cover for critical times, along with getting their investments in the market on track.

The pandemic has also upended money planning parameters for many families. Around 41 percent of those assessed highlighted financial security for the family as a key goal, followed by retirement planning and investing (39 percent).

What are ULIPs?

Simply put, ULIPs offer a combination of investment and insurance. So, along with a cover, the policyholder also gets the choice to invest in equity or debt instruments, depending on their risk appetite. A certain portion is set aside as cover for life insurance, while the remaining is invested in the market for return generation. These investments can be switched from time to time, between different asset classes to gain maximum returns from conducive market movements.

However, as per the IRDAI handbook on Indian Insurance, the share of ULIP funds in the total AUM (Asset Under Management) has been constantly falling, from 16.94 percent in 2014 to 11.65 percent in 2019 to almost 9.6 percent in 2020. As of 31st March 2020, the total corpus under ULIPs stood at Rs 3,73,072 crore, a 9 percent dip from the previous year, when it was at Rs 4,11,425 crore.

Often termed as a complex product, the survey also revealed that lack of flexibility and control are the two major areas that act as a deterrent to investment in ULIPs. But given that insurance coverage on death was not the driving factor behind opting for market-linked products in the study, the focus on good returns and tax benefits puts to light the structure of this investment product, that fuses investment and insurance, two of the most fundamental pillars of financial planning.

Tax exemptions on maturity proceeds from ULIPs can only be availed if the annual premium that is paid is not beyond Rs 2.5 lakh, as per notifications in Budget 2021. Investors can also add top-ups and critical illness riders on their existing life insurance policy under ULIP to make it more robust and comprehensive. With a lock-in period of at least 5 years, it is advisable to look at them as a medium to long-term investment option. Notably, if the ULIP is surrendered within the first 3 years, the life cover will also cease to exist.

Other than that, considering the fund manager’s performance and the expenses charged should also be a factor to think about. IRDAI has capped the annual charge on ULIPs at 2-2.25 percent per annum for the first 10 years, but this needs to be compared with expense ratios of other mutual funds as well.

Viral Bhatt, Founder, MoneyMantra, focuses on singling the goal for which ULIPs are being opted. “Investors should look at factors like the portfolio of the product, expenses, past performance, liquidity, and the goal for which one is investing --whether you want insurance or wealth creation,” he added