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3 Tips To Optimise Your ULIP Experience
Post reforms, many ULIP's have become worthy of your consideration. Make sure you assess fund performances, fund manager pedigree, as well as all associated costs before you sign up for one. Follow the three pointers detailed above for best results
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ULIP's were all the rage between 2005 and 2009. Bankers and Insurance Advisors cashed in on the soaring equity indices and recommended ULIP's by the dozen, raising questions on whether customer needs were being properly assessed prior to making recommendations in the first place. Ironically, once ULIP commissions were rationalised by the IRDA in 2009, their share within the overall Life Insurance pie fell from a sizable 41% to a miniscule 13% in the 7 years that followed! All the more evidence that in our country, Life Insurance is sold and not bought - and commission pay outs continue to squarely drive sales of a given product or category.
ULIP's have actually come a long way in the past few years, and are not quite the bane they used to be prior to 2009 - when anything from 20% to 70% of your first-year premiums were slashed away as 'distribution costs' (read: commissions) and, like the proverbial lame horse, your moneys didn't quite stand a chance to race ahead! According to research portal Morningstar, 5 years returns from large cap ULIP funds and small/mid cap ULIP funds have averaged a neat 15.23% and 22.34%, respectively. Here are the top three (often ignored) steps that ULIP investors can take, to optimise their experience with the product.
Opt for a sensible balance between death benefit and investment
Most ULIP investors are oblivious to the fact that a certain number of their investment units are cancelled each year in lieu of the mortality costs associated with providing them with a death benefit. IRDAI norms currently stipulate that the minimum sum assured associated with a ULIP should be ten times the annual premium - for instance, if you're committing Rs. 5 lakhs per annum to your ULIP, it necessarily must carry a sum assured of Rs. 50 lakhs at the very least. Anything from Rs. 5,000 to Rs. 20,000 per annum (depending upon one's age, lifestyle and health indicators) would be deducted from the fund value each year in lieu of this death benefit.
Unfortunately, many ULIP investors view this mortality cost deduction as a bane - whereas, ironically, it's the most important feature of the policy in reality. Life Insurance is primarily designed to be a risk transfer tool, and any savings or investment element needs to be viewed as a secondary benefit to this feature - not the other way around. For best results, investors must strike a sensible balance between their sum assured value and their investment allocation. For instance, if Rs. 1 Crore is an optimal death benefit amount for you keeping your life stage and family goals in mind, you could consider increasing the sum assured amount, even at the cost of a smaller allocation to your investment funds.
Decide your Asset Allocation carefully
Far too many ULIP investors remain blissfully unaware of where their money is really going! Each ULIP will typically give you the option to invest into a couple of different types of equity funds, a fixed income fund, and a cash fund. The vast majority of Life Insurance agents are (unfortunately) no more than sales people, and pay scant attention to your asset allocation and whether it's in sync with your life stage and goals. Oftentimes, clients look back at their policy statements a few years later and balk at the fact that their portfolios hardly grew, whereas markets soared in the same period. Upon closer inspection, in turned out that they were unknowingly parked 100% into fixed income funds during the time.
If you're young, and have a long-term investment horizon, there's no reason why you shouldn't be open to having more volatility in your portfolio in order to enhance your future scope for returns. Stat alert to your fund selection, in order to avoid inadvertently making investments that are out of sync with your objectives. If you're confused about your ideal asset allocation, the services of a qualified Financial Planner could come in handy.
Rebalance your Portfolio Annually
Most ULIP's allow a certain number of free 'switched' each year, and you should ideally avail these on your policy anniversary date to bring your portfolio back in sync with your ideal asset allocation. For instance, you many have decided that an 80:20 allocation between a large cap fund and a corporate bond fund is what suits you best, but an equity market rally may have moved you to a 90:10 allocation a year hence. In such a scenario, it would make sense for you to switch 10% of your portfolio into the corporate bond fund and take your portfolio back to its planned division between equity and debt.
End Note: Post reforms, many ULIP's have become worthy of your consideration. Make sure you assess fund performances, fund manager pedigree, as well as all associated costs before you sign up for one. Follow the three pointers detailed above for best results.