During the season of upbeat market euphoria, ULIP was introduced in the market. At that time people were easily used to get easy money as the stock market was reaching new heights every day. This led to the demand and emergence of an insurance plan that is linked to the market returns and within no time this plan became a huge success. The product’s feature of providing the safety of insurance as well as returns of stock market with the choice of investment by Individual, made it highly popular among the people. Things went pretty well till the market crashed. due to its high charges and fees, market crash lead to a double whammy for ULIP holders as the Returns turned negative which was further worsened by high fees associated with the product.
As the situation became worst for the investors , it forced IRDA to take various measures to introduce changes and reform the product .The new ULIP came out to be a much better product with major features like increase in the minimum investment period, capped the charges and distributed it over the period, and capped the maximum charges that insurance companies can deduct from the gross yield.
DIFFERENCE BETWEEN TRADITIONAL INSURANCE AND ULIP
In spite of IRDA’s change of structure and features of ULIP, there are many more differences which can be compared with that of traditional insurance products. Some of the differences are like:
Returns –Returns from ULIP vary as per market condition, the long term ULIP provide better returns as its performance linked with the market. Whereas Traditional insurance plans provide specified range of low rate of returns as ULIPs invest their major part in stock market while traditional insurance plans invest major part in Government debt.
Charges –ULIPs entail higher charges and are more transparent while the charges in traditional insurance plans are not very clear and remain unknown. Moreover, ULIPs’ charges have become quite reasonable since IRDA restructured the plan.
Flexibility –ULIPs are flexible. Investors can choose to pay the premium for minimum few years and then stop or pay higher or lower amount depending on their capacity. Traditional insurance typically do not provide as much flexibility but now traditional insurance plans have come up with payments for minimum few years.
Liquidity-ULIPs can be liquidated after a certain number of years when the market seems to have given good returns. This will give high returns to investors. On the other hand, traditional insurance plans typically have consistent returns. This doesn’t give a chance to make high returns. Moreover, ULIPs provide options to customise your products to suit your needs. The range of options in ULIP is wide.
Needless to say, ULIPs are market linked products and hence offer much better liquidity than traditional insurance plans. Investors can come out of ULIPs by selling at the current NAV.
IMPORTANT POINTS TO KEEP IN MIND
Investors must understand that ULIPs and traditional insurance plans are both insurance products. Only their investment philosophy is different. Hence to get the maximum out of both the schemes, investors should pay the premium for complete term. Investors should pay the premium religiously and avoid withdrawing, selling, or taking loan against it in any case. If there is emergency, the case can be different.
ULIPs are market oriented products. Market gives better returns over long term but fluctuate widely in short term. Hence investors should not check their NAV and get panicky and sell. The NAV will go up when the market recovers. Investors should not expect good returns in short term.
Finally, depending solely on ULIP or traditional insurance would not be a right strategy as the sum assured in case of traditional insurance can be less and NAV in case of ULIP may not suffice. Hence investors should think of getting a term insurance too which can assure a very high sum at a smaller premium. Term insurance is pure insurance where your dependent will get a large amount in case of any eventuality. They will get nothing if nothing happens to you.
CONCLUSION
Each one of us have different needs, requirements and risk appetite. Investors should look at all the options in ULIP and traditional plans available and see what suits them. A person with larger investment horizon can invest in high risk market oriented plan while someone with low investment horizon can go for less safe debt plan. Investors have to set a balance between their risk appetite and expectation of returns. This will help in optimising the returns from ULIPs.
At the same time, traditional insurance are less risky but also give lower returns. Investors can take traditional insurance if they are not comfortable with the idea of market linked returns.
Make a wise decision....
