Reasons why low-cost ULIPs score over endowment plans

Yashish Dahiya

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Investors are mostly risk-averse. Hence, they always prefer to invest in fixed-income instruments such as bonds, fixed deposits and debt-based funds. As per a recent report published by a wealth management firm, only 16 per cent of Indian consumers put money in equity-based products while a whopping 41 per cent of the consumers trust debt-based products. This shows why people prefer traditional plans over a farsuperior product such as ULIPs in the insurance space.

If you are also among those who think that it is wiser to put money in an endowment plan just because the investment-associated risk is lower in an endowment plan than that in a ULIP, you need to rethink. The newer version of ULIPs — low-cost in nature — offers far more benefits than endowment plans, and that’s not only in terms of providing high return on investment. Following are reasons that make ULIPs a better alternative to endowment plans in the existing market conditions.

Transparency

ULIPs score over endowment plans hands down in terms of transparency. When you buy an insurance-cum-investment plan, a certain amount of money is kept aside by your insurer for the life cover, and the remaining amount is invested in the capital market. Under ULIPs, from the first day, you get a clear idea about the amount of your money getting invested in the market. When you invest in an endowment plan, you will have no idea what portion of your money is getting invested, what portion of your money is earned by your agent as his commission, and what portion is kept aside for the insurance cover. Even the rate of return in an endowment plan is not known to the investors. But the investors are always well informed about the charges deducted under a ULIP. No such detailed information is disclosed to the customer of an endowment plan.

Flexibility

ULIPs allow investors to enjoy absolute flexibility of choosing the investment fund, based on their risk appetite. While in an endowment plan, your money gets invested mainly in debt market whereas ULIPs open up a wider range of investment avenues for you. Under a ULIP, you can choose an equity fund or a debt fund or a combination of both (balanced fund), as per your risk tolerance. Moreover, based on the market performance, you can switch from an equity fund to a debt fund (or vice versa), anytime you want. Most companies allow a few free fund switches in a year. Typically, these are 3-4 times depending on the nature of product and insurer. Then too, the insurer charges only a nominal amount for switching funds after the free limit exceeds.

Though fund switching helps you maximise the return on your investment, it is recommended that you leave the task on your fund managers, unless you are an expert in market timing. No such flexibility, however, is enjoyed by the investors under an endowment plan.

Higher returns

Most people find it safer to invest in debt markets. As a result, they prefer endowment plans over ULIPs. However, what they overlook are the returns on investment. Historically, ULIPs typically gave returns of 12-14 per cent, if you stay invested for more than five years. Moreover, debt funds are also available in ULIPs. However, the benefits of investing consistently and periodically in the equity markets can be seen in the long run.

Let’s take help of an example to draw the comparison between an endowment plan and a ULIP. If you invest Rs1 lakh annually for 30 years in a debt fund of a ULIP, you will earn around 7.5-9.5 per cent return on your investment. For the same amount of investment in an endowment plan, the interest earned will be nothing more than 3-5 per cent. However, for the same amount of investment in an equity-linked ULIP, you will earn an interest typically more than 12 per cent for such a long period of time. Thus, the amount of return you will receive from ULIP after 30 years will be substantially higher than that received from an endowment plan.

In terms of transparency, flexibility and return, low-cost ULIPs score over any other insurance-cum-investment schemes available in the market. So, if you want a high amount of return and not only a life cover from your insurance plan, then ULIPs are a better option.

The author is Co-founder & CEO, PolicyBazaar.com. The views expressed in this article are his own.