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Unit linked insurance plan (ULIP) has been doing wonderfully well in the recent past, and is currently popular over regular endowment plans. Lets try and analyze the reasons where ULIP's seem to have caught people's fancy over endowment plans:
1. The power of equity: ULIP's offer the opportunity to invest upto 100% in equity. Equities are best prepared to deliver better returns as compared to fixed return counterparts like bonds and government securities thus preferred by the policy holder as life insurance is a long term contract
2. Flexibility: Along with the opportunity to invest 100% in equity, ULIP's also provides the flexibility to shift upto 100% debt. An individual has the freedom to allocate his premiums between equity and debt, which is not the case with endowment plans. ULIP's are available in 3 broad variants: 'Aggressive' ULIPs, which invest upto 100% of their corpus in equities, 'Balanced' ULIP's which invest upto 60% of their corpus in equities and 'Conservative' ULIP's which invest upto 100% of their corpus in debt instruments and the money market instruments. In ULIP an individual is also given the freedom to terminate or resume premiums increase or decrease premiums and pay top ups whenever possible, an option which is unavailable in regular endowment plans.
3. Transparency: There was an element of transparency missing in traditional endowment plans. The investor had no idea how much money is in invested in debt/ equities and what portion of his premium will be invested in equities and since they had no access to portfolios, investments were purely on the basis of faith.
Today ULIPs has introduced transparency where an individual can have first hand knowledge about the investments and how much portion of his investments is invested and where. This also enables the insurers to compare plans across the various competitors and help him decide which one is best suitable for him. There is a sense of accountability, which helps insurers be updated at regular intervals about their investment and their moneys worth.
4. Liquidity: ULIP plans allow greater liquidity compared to the endowment policies. This also allows partial liquidity where by one can withdraw a part of their investment, yet keep the policy alive. This comes handy when an individual is in a cash crunch and has few liquid investments at his disposal.
There are no surrender charges as in the case of endowment policies where the insurerer stands to lose out on surrender charges when they surrender their policies. This means that the insurer gets full market value of his investments, net of charges till date.
However, how far can ULIP plans be considered as a safe investment needs to be seen, since they are vulnerable to the vagaries of the stock market and easily burn a hole in the portfolio over a short term proving this kind of investment to best suitable for the ones with bullish instincts. For those who cannot withstand such volatility, it's best to have a mixed basket of prudent endowment and ULIPs depending on their preference for either long-term growth or stability.
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