For life insurance, term insurance is a simple, cost-effective and wise choice. But there are still many who want to put money in LIC’s traditional insurance plans like Moneyback policies and Endowment plans.
But does it make sense to choose ULIPs over LIC’s traditional plans?
I actually got this question from a friend of mine. He knows that I am not in favour of mixing investment and insurance. But he was curious about what I thought if the choice was restricted between ULIPs and the Endowment policies of ULIP.
So I thought I would write about it.
LIC’s traditional policies are quite popular in India. And I am sure you know why. Everyone has those LIC uncles and relatives who end up selling LIC plans when one starts earning. By the time one realizes that these are best avoided, it’s already several years of premiums paid.
But if you compare ULIPs with Traditional Insurance Plans, then you will realize that the former are better bets. Not for life insurance cover. But if you compare these two in terms of investment options.
Both are hybrid instruments that offer investment and life insurance via a single product. A part of the premium paid is deducted as a mortality charge i.e. to provide life insurance and the remaining part is invested in funds (after a few other expenses).
Unlike traditional endowment plans, ULIPs are market-linked products. A part of the premium is used to provide life insurance, while the rest of the money is invested in a mix of equity and debt instruments based on the investor’s choice, risk appetite and goals linked to the ULIP. There are different types of ULIP plans that are pitched as products for different goals. Like ULIP Plans for Retirement, ULIP Plans for Children’s Future, etc.
Talking of returns, how do endowment plans compare with ULIPs?
Traditional endowment plans are pretty opaque but in general, these products deliver 4-6% average annual returns if you hold these till maturity (after all loyalty addition, bonus, etc.). Yes. The returns are that low. And if you consider that generally these plans are purchased for 15-30 years, then the low returns seem like a bad deal.
Why?
Because for long-term goals, it’s best to invest in instruments/assets that provide inflation-beating returns. Something like equity funds can be expected to deliver 10-12% average returns if chosen funds do well and if one remains invested for long enough.
And how does this compare with ULIP returns?
ULIPs are quite flexible products that allow one to choose the allocation between equity and debt and decide how much equity to hold.
The regulators don’t allow insurers to guarantee any returns. But in general, ULIPs showcase benefit illustrations with nearly 8% return per annum. But the actual return will be higher or lower depending on the allocation chosen and on the underlying performance of each asset class or the fund option. The actual XIRR might be slightly lower than ULIP fund returns as The ULIP fund performances are reported at a gross level and certain charges like Mortality charges, FMC, etc. are deducted by cancelling ULIP units. It is for this reason that one should not directly compare the NAV Of mutual funds and the NAV of ULIP’s underlying funds.
But if high equity fund options are chosen and if one remains invested for long, then ULIPs can potentially deliver better returns than LIC’s traditional endowment policies. Also, ULIP investors are allowed to switch between equity and debt without any incidental tax in the middle. This, for many years, has been the key attraction for many HNIs preferring ULIPs. Though recent changes in taxation of ULIPs in India with an annual premium of about Rs 2.5 lakh have changed things a bit for such HNI investors.
Even the government-backed LIC has many ULIPs and surprisingly, one named SIIP from LIC to make it sound similar to mutual fund SIP.
ULIPs are far more transparent than LIC policies (as these are market-linked) and in essence, a significant improvement over them.
The ULIPs of today are much better products than what was available years back in the early 2000s when misselling was rampant.
The general advice continues to keep insurance and investments separate and stick to term plans for pure life insurance and mutual funds for investments. But still, there is a case for new ULIPs for a class of investors who understand the product structure and for whom, it’s a good fit in their overall portfolio of investment products. It is those investors who should check with their investment advisors about how to choose the best Unit Linked Insurance Plan (ULIP) in India (2023).