An ULIP - Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both.
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
A Systematic Investment Plan is a method of investing in a mutual fund.
An SIP allows you to regularly invest in a mutual fund. This ensures discipline and regularity in savings. When the Net Asset Value is high, you will get few units. When it is low, you get more units. Over time it evens out.
Even as ULIPs are selling like hot cakes, one common doubt in most people’s mind is why they cannot buy a mutual fund and top it up with a term insurance policy instead of buying a ULIP? There are a number of matters to consider here – the cost of life insurance, the reason for investment, the investment horizon and so on.
Cost of life insurance
In a ULIP, your premium is divided into your risk cover and your investment. That means, out of the total premium that you pay, a certain percentage will be deducted as risk cover to provide for your insurance and the balance will be invested in a fund. Your risk cover charge will increase every year with your age. As a result the investment allocation will reduce.
Suppose that you buy a ULIP when you are 30 years old. The sum assured is Rs 5 lakh and the term is 20 years. The premium that you will pay over a period of 20 years will work out to around Rs 25,000 to Rs 30,000 depending on the company you choose.
In a term policy, your premium will remain fixed throughout the term of the policy. So that means, if you opt to invest in a mutual fund and buy a term policy, the amount of investment and cost of insurance will not change over a period of time. For a similar example as above, if the 30 year old were to take a term insurance policy for Rs 5 lakh, he would end up paying anywhere between Rs 40,000 to Rs 50,000 as insurance premium.
This vast difference in cost of insurance is mainly because of cost of distribution and administration as also the margins of the insurer. In a ULIP, costs and margins are recovered commonly between the investment portion and the insurance portion. However, if you were to buy a term policy and a mutual fund, the insurance company will recover its costs of distribution and administration as well as margins. The mutual fund would again recover the same costs from your investment portion.
Flexibility
A ULIP will give you flexibility of increasing your life cover, while maintaining the same premium. This is done by simply reducing your investment allocation. So suppose you have a risk cover of Rs 5 lakh and would like to increase it to Rs 6 lakh, you can still continue to pay the same amount of premium. The only difference would be that the amount deducted towards the risk cover would be more and therefore, the amount invested would be less.
If you have a term policy and would like to increase your life cover, your only option would be to buy another term policy. This would mean paying administration charges all over again.
There’s more to the flexibility. With a ULIP you don’t have fear that your policy will lapse if you were unable to pay your premium. The cost of insurance will be taken out of your existing investment to keep the policy going. But if you fail to pay premium on your term policy, it will lapse.
Expenses
If you were to look at the expenses of a ULIP as compared with the expenses of a mutual fund, there is a difference. In a ULIP charges are front loaded, which means, most of the charges are recovered within the first few years. That is why it does not make sense to invest in a ULIP if you are looking at a short term. Look at a mutual fund if you are looking at a time horizon of 3-5 years. In the long term, charges of a ULIP even out and compare well with a mutual fund.
So if you are looking for a long-term investment avenue with an insurance cover that goes with it, then ULIP is the product for you and if you are looking at a product that helps you focus purely on investment and returns over a medium term, then go for a mutual fund. Experts say the two products are different and ideally you should have both in your portfolio.
ULIPs vs Mutual Funds: Who's better?
Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.
Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.
However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs.
Despite the seemingly comparable structures there are various factors wherein the two differ.
ULIPs vs Mutual Funds
ULIPs Mutual Funds
Investment amounts Determined by the investor and can be modified as well Minimum investment amounts are determined by the fund house
Expenses No upper limits, expenses determined by the insurance company Upper limits for expenses chargeable to investors have been set by the regulator
Portfolio disclosure Not mandatory* Quarterly disclosures are mandatory
Modifying asset allocation Generally permitted for free or at a nominal cost Entry/exit loads have to be borne by the investor
Tax benefits Section 80C benefits are available on all ULIP investments Section 80C benefits are available only on investments in tax-saving funds
• There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.
Term Insurance Policy
Term Insurance Policy is a no frills life insurance plan and it covers your life for a term of one or more years. It pays a death benefit only if a person die's within the term period. Term Insurance generally offers the cheapest form of insurance, because it does not offer any residual value on maturity. You can renew most Term Insurance policies for one or more terms even if your health condition has changed. Each time you renew the policy for a new term, premiums may climb higher. Term insurance policies, cover only the risk during the selected term period and some times it is also called as "pure risk policy". Term Insurance is the simplest, traditional and the also cheapest life insurance available.If the policyholder survives the term, the risk cover comes to an end or if the policy holder dies in between the term period his family members or nominee receives the insured amount by the insurance company.
There is no limit to the amount of insurance cover you can buy for your self, but it is advisable that your should least have 8 to 10 times of your yearly income as term insurance cover. The logic behind this calculation is that in case you suffer a sudden loss of life, your family or dependents should have sufficient amount to sustain the expenses for atleast 8 to 10 years. A Term insurance plan is a pure risk cover plan and it also meet the needs of people who are initially unable to pay the larger premium required for a whole life or an endowment assurance policy, but they hope to be able to pay for such a policy in the near future.
ULIP's usually have following charges built into it :
a) Up-front Charges
b) Mortality Charges ( Charges for providing the risk cover for life)
c) Administrative Charges
d) Fund Management Charges
Mutual Fund's have the following charges :
a) Up-front charges ( Marketing, Advertising, distributors fee etc.)
b) Fund Management Charges ( expenses for managing your fund)
Term Insurance have the following charges :
a) Yearly premium ( for risk cover)
b) Service charges
We again iterate that we are not against ULIP but the way they are being sold in the market is quite worrisome. Our advise is not to buy any insurance plan unless you fully understand the terms and why it is beneficial to you.
Points to remember when you are buying insurance specially ULIP's
a. Do you need it, if yes why ?
b. What is the life insurance cover you are getting for the premium you pay.
c. Can you get the same insurance cover with any other plan?
d. For how long will I have to pay the premium ?
e. What will happen if I stop the premium payments?
f. What are the charges if I discontinue the policy in between ( Expensive Option)?
g. Is the comparison given to you correct, does it factor into account the above charges for the sake of comparison.
h. If you receive an excel sheet please check the calculations on each cell.
i. Some companies charge expenses in the initial years and others at the end of the terms.
j. Illustrations with returns of 25% or 30% are quite common. Ask the representative to make a calculations on a 6% or 10% returns as per IRDA norms.
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
A Systematic Investment Plan is a method of investing in a mutual fund.
An SIP allows you to regularly invest in a mutual fund. This ensures discipline and regularity in savings. When the Net Asset Value is high, you will get few units. When it is low, you get more units. Over time it evens out.
Even as ULIPs are selling like hot cakes, one common doubt in most people’s mind is why they cannot buy a mutual fund and top it up with a term insurance policy instead of buying a ULIP? There are a number of matters to consider here – the cost of life insurance, the reason for investment, the investment horizon and so on.
Cost of life insurance
In a ULIP, your premium is divided into your risk cover and your investment. That means, out of the total premium that you pay, a certain percentage will be deducted as risk cover to provide for your insurance and the balance will be invested in a fund. Your risk cover charge will increase every year with your age. As a result the investment allocation will reduce.
Suppose that you buy a ULIP when you are 30 years old. The sum assured is Rs 5 lakh and the term is 20 years. The premium that you will pay over a period of 20 years will work out to around Rs 25,000 to Rs 30,000 depending on the company you choose.
In a term policy, your premium will remain fixed throughout the term of the policy. So that means, if you opt to invest in a mutual fund and buy a term policy, the amount of investment and cost of insurance will not change over a period of time. For a similar example as above, if the 30 year old were to take a term insurance policy for Rs 5 lakh, he would end up paying anywhere between Rs 40,000 to Rs 50,000 as insurance premium.
This vast difference in cost of insurance is mainly because of cost of distribution and administration as also the margins of the insurer. In a ULIP, costs and margins are recovered commonly between the investment portion and the insurance portion. However, if you were to buy a term policy and a mutual fund, the insurance company will recover its costs of distribution and administration as well as margins. The mutual fund would again recover the same costs from your investment portion.
Flexibility
A ULIP will give you flexibility of increasing your life cover, while maintaining the same premium. This is done by simply reducing your investment allocation. So suppose you have a risk cover of Rs 5 lakh and would like to increase it to Rs 6 lakh, you can still continue to pay the same amount of premium. The only difference would be that the amount deducted towards the risk cover would be more and therefore, the amount invested would be less.
If you have a term policy and would like to increase your life cover, your only option would be to buy another term policy. This would mean paying administration charges all over again.
There’s more to the flexibility. With a ULIP you don’t have fear that your policy will lapse if you were unable to pay your premium. The cost of insurance will be taken out of your existing investment to keep the policy going. But if you fail to pay premium on your term policy, it will lapse.
Expenses
If you were to look at the expenses of a ULIP as compared with the expenses of a mutual fund, there is a difference. In a ULIP charges are front loaded, which means, most of the charges are recovered within the first few years. That is why it does not make sense to invest in a ULIP if you are looking at a short term. Look at a mutual fund if you are looking at a time horizon of 3-5 years. In the long term, charges of a ULIP even out and compare well with a mutual fund.
So if you are looking for a long-term investment avenue with an insurance cover that goes with it, then ULIP is the product for you and if you are looking at a product that helps you focus purely on investment and returns over a medium term, then go for a mutual fund. Experts say the two products are different and ideally you should have both in your portfolio.
ULIPs vs Mutual Funds: Who's better?
Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.
Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.
However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs.
Despite the seemingly comparable structures there are various factors wherein the two differ.
ULIPs vs Mutual Funds
ULIPs Mutual Funds
Investment amounts Determined by the investor and can be modified as well Minimum investment amounts are determined by the fund house
Expenses No upper limits, expenses determined by the insurance company Upper limits for expenses chargeable to investors have been set by the regulator
Portfolio disclosure Not mandatory* Quarterly disclosures are mandatory
Modifying asset allocation Generally permitted for free or at a nominal cost Entry/exit loads have to be borne by the investor
Tax benefits Section 80C benefits are available on all ULIP investments Section 80C benefits are available only on investments in tax-saving funds
• There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.
Term Insurance Policy
Term Insurance Policy is a no frills life insurance plan and it covers your life for a term of one or more years. It pays a death benefit only if a person die's within the term period. Term Insurance generally offers the cheapest form of insurance, because it does not offer any residual value on maturity. You can renew most Term Insurance policies for one or more terms even if your health condition has changed. Each time you renew the policy for a new term, premiums may climb higher. Term insurance policies, cover only the risk during the selected term period and some times it is also called as "pure risk policy". Term Insurance is the simplest, traditional and the also cheapest life insurance available.If the policyholder survives the term, the risk cover comes to an end or if the policy holder dies in between the term period his family members or nominee receives the insured amount by the insurance company.
There is no limit to the amount of insurance cover you can buy for your self, but it is advisable that your should least have 8 to 10 times of your yearly income as term insurance cover. The logic behind this calculation is that in case you suffer a sudden loss of life, your family or dependents should have sufficient amount to sustain the expenses for atleast 8 to 10 years. A Term insurance plan is a pure risk cover plan and it also meet the needs of people who are initially unable to pay the larger premium required for a whole life or an endowment assurance policy, but they hope to be able to pay for such a policy in the near future.
ULIP's usually have following charges built into it :
a) Up-front Charges
b) Mortality Charges ( Charges for providing the risk cover for life)
c) Administrative Charges
d) Fund Management Charges
Mutual Fund's have the following charges :
a) Up-front charges ( Marketing, Advertising, distributors fee etc.)
b) Fund Management Charges ( expenses for managing your fund)
Term Insurance have the following charges :
a) Yearly premium ( for risk cover)
b) Service charges
We again iterate that we are not against ULIP but the way they are being sold in the market is quite worrisome. Our advise is not to buy any insurance plan unless you fully understand the terms and why it is beneficial to you.
Points to remember when you are buying insurance specially ULIP's
a. Do you need it, if yes why ?
b. What is the life insurance cover you are getting for the premium you pay.
c. Can you get the same insurance cover with any other plan?
d. For how long will I have to pay the premium ?
e. What will happen if I stop the premium payments?
f. What are the charges if I discontinue the policy in between ( Expensive Option)?
g. Is the comparison given to you correct, does it factor into account the above charges for the sake of comparison.
h. If you receive an excel sheet please check the calculations on each cell.
i. Some companies charge expenses in the initial years and others at the end of the terms.
j. Illustrations with returns of 25% or 30% are quite common. Ask the representative to make a calculations on a 6% or 10% returns as per IRDA norms.