Case for investing in ULIPs

Friends,

The following what appeared recently in 'The Hindu' and represents excerpts of an interview of Mr. Suresh Parthasarathi of Bharati AXA Life and explains ULIPs in a good way:

" What differentiates ULIPs (Unit-linked insurance plans) from other market-linked savings schemes? Should you invest in them? In an e-mail interview with Business Line, Mr V. Srinivasan, CFO, Bharti AXA, makes a case for investing in ULIPs, highlighting their flexibility and tax efficiency as reasons that make them an attractive “wealth management- financial protection” solution. Excerpts from the interview:

Why should one invest in ULIPs?

Unit-linked plans (ULIPs) are a category of financial solutions that combine financial protection with market-led investment returns. Today, ULIPs have developed to becoming an able financial partner at important life stages of diverse customer segments.

ULIPs enable long-term wealth creation for a future need, such as children’s higher education, marriage and retirement, which is typically the foremost objective of any financial planning exercise. They offer long-term financial protection and scope for wealth creation and management in accordance with the customer’s risk appetite. Financial protection encourages the customer to confidently live a quality life, as it provides scope to protect his dependents financially should an eventuality arise. All this, while allowing for investment.

Again, doing a cost-return comparison between ULIPs on the one hand, and other market-linked saving instruments and separate financial protection on the other hand, ULIPs indicate a better performance than such instruments and standalone life insurance put together. Also, the cost of purchasing life protection separately through a term plan is more than the in-built mortality charge within ULIPs. The ULIP charge structure is comparable and at times, even competitive to other market-linked products over a term of over eight years.

Some ULIPs offer special loyalty additions over longer tenures, thus ensuring that the fund value grows at a pace faster than the returns generated, helping the customer beat the pressure of inflation.

In what way are ULIPs more flexible than other market-linked savings schemes?

ULIPs allow the flexibility of switching funds for a given number of switches every year for free. However, the customer bears the entry load (and even exit loads in some cases) for moving into a debt or equity fund from the other, in other forms of market-linked investments.

ULIPs also provide flexibility to decrease or increase protection over the term of the plan, as the protection needs of an average customer changes over his/her lifespan. Further, ULIPs offer the flexibility to add health insurance coverage by adding critical illness riders. Most ULIPs also offer customisation whereby the customer can enhance or reduce or even totally drop such additional insurance covers during the term of the product.

Flexibility in premium payment is another benefit provided by ULIPs. Most ULIPs provide options to increase or reduce premiums after three years. While stopping premium payment is not conducive to long-term wealth generation, ULIPs, with their low or nil surrender charges, are customer-friendly in that they allow withdrawal of fund value in emergencies. ULIPs also provide an option to “enhance” the kitty using top-ups that add to the existing fund value.
Such flexibility to add, reduce and shift funds within the same policy is unique to ULIPs.

ULIPs are as transparent as other market-led investments. Every time the customer chooses a ULIP, he/she is provided a sales benefit illustration that explains the premium utilisation and charges, year by year, for the term of the plan.

From a tax perspective, the premiums paid and the maturity proceeds from ULIPs are generally tax-free. However, the maturity proceeds from debt-oriented funds are classified as capital gains.

All these benefits rolled into one single product category is available only with ULIPs, making them an attractive ‘wealth management-financial protection’ solution.

Do you have any unique offerings within ULIPs?

AspireLife, our best-selling product, is the first-of-its-kind for the Indian life insurance industry.
It offers the customer a clear benefit that differentiates it from other products in this category — the first year premium is kept aside to provide the customer guaranteed special additions, up to 175 per cent of the first year premium, at maturity.

From the second year onwards, if the premium is Rs 50,000 or more, the premium allocation charges are waived i.e. 100 per cent of the premium is invested in the funds.

In addition, the product promotes long-term and systematic investments by offering term options of 15, 20 and 25 years.

What differentiates Bharti AXA Life from its competitors?

Bharti AXA Life benefits from the product strengths of its global parent. AXA has proven expertise in product design to suit diverse consumer segments. The company’s product blueprint serves as a ready reckoner for any of its markets to launch products to suit the local market condition.

For us, such expertise has offered our products not just quick time-to-market but also the opportunity to bring to the Indian customer the best of product benefits available in global markets. One key benefit is the long-term nature of our products, which offers scope for wealth creation while providing insurance protection over the term.

In addition, AXA believes in providing insurance solutions based on a thorough understanding of customer needs. The company follows a research-based approach to understand customer trends and protection and investment attitudes. The AXA Retirement Scope launched in 2004 evaluates retirement attitudes of people across the globe. This year, research was conducted in 26 countries, with India as a first-time participant.

Are your charges competitive to your peers?

The charge structure of every product is different and cannot be the only measure of product benefit to customers. It is important to evaluate the net return to customer in the light of total investments made. This can be ascertained by comparing the IRRs (Investment Rate of Returns). "

Krishna Kumar Khandelwal