The Hindu Business Line : ‘ULIPs offer flexibility and protection’

ULIP products offer market-related returns but they require investors to revisit the asset allocation according to risk appetite and market conditions.

Mr Anuj Agarwal, Chief Financial Officer, SBI Life.

Suresh Parthasarathy

Even if you’ve just begun your career or investment planning, you are likely to have heard of Unit Linked Insurance Plans (ULIPs). Do ULIPs enjoy an edge over other options? Mr Anuj Agarwal, Chief Financial Officer of SBI Life, a leading insurer with assets of Rs 6,500 crore under management, takes on some questions on ULIPs.

Why should an investor choose an ULIP when a combination of a pure term policy and an investment in a mutual fund basket may do just as well?

It is quite common for an investor to think on these lines. Therefore, it is important to know why one should take a ULIP. ULIPs provide better flexibility in terms of protection cover as well as flexibility in investment options with attractive tax advantages.

Generally, ULIPs offer enhanced protection where Sum Assured as well as Fund Value is payable. In such a case, the cover is flat throughout the term of the plan and works similar to a term product.

An interesting option is in case the death benefit is defined as higher of Sum Assured or Fund Value. This method is more cost-effective for the customer as, every month, the premium is calculated on the difference between sum assured and Fund Value.

Another convenience for the policy holder in ULIPs is that the mortality charges are directly deducted from the Fund Value on a monthly basis, reducing the risk of lapsing. It is also possible to increase or decrease the Sum Assured as per the contract rules with a simpler process compared to applying for a new cover.

Generally ULIPs have a large variety of investment options, from the riskiest to the more secure, and from pure equity funds to bond and money market fund, with all possible combinations. According to the risk profile, this allocation can be modified for future premium as well as for premium already invested (switching facility). This, without any taxability issue.

This is not the in case in mutual funds, where you have to sell (taxability issue) and repurchase new mutual funds (on payment of entry charges) if you want to change your allocation. Moreover, ULIP products provide market-related returns and protection under a single product.

What are the striking features of ULIPs as compared to ELSS Mutual fund schemes?

The horizon of investment is not the same. ELSS is medium term whereas ULIP is more long term.

The tax advantages are higher in ULIPs (entry + maturity) as compared to ELSS.

Lock-in period for ELSS is three years. During this period you cannot reduce your risk.

Lock-in period for ULIPs is three years but, through switching facility, you have the flexibility to change your investment pattern.

Maturity benefit after three years in ELSS is taxable as Capital gains at 10 per cent or 20 per cent.

In ULIPs, maturity benefits are tax-free as per the current tax laws and partial withdrawal also is tax-free.

ULIPs offer protection-cum-market-related returns. Under the same product, you have a wide range of investment options.

Is there anything different that SBI Life Insurance ULIP offers over competitors’ products?

SBI Life’s ULIPs have been designed to cater to different customers. Those who know about the markets can opt for Unit Plus products where they can manage their investment options and change them throughout the term of the policy in keeping with their risk appetite.

Entry charges have been calculated to be, on average, on a 10-to-15-year basis, on the same level as a mutual fund. Moreover, we offer guaranteed additions by way of free allocation of units to loyal customers.

Our Unit Plus product is a Swiss knife ULIP product, where one product caters to almost all insurance needs. ULIP products offer market-related returns but they require investors to revisit the asset allocation according to risk appetite, market conditions and term to maturity.

You may opt to take higher risk against probability of higher return when you are not close to maturity; but you would like to secure your returns when you come closer to maturity.

Most people do not have sufficient knowledge of the financial market or time to manage their ULIP product.

Taking this into account, in 2005, SBI Life offered a hassle-free investment product: Horizon with a unique Automatic Asset Allocation coupled with Automatic rebalancing facility concept: An algorithm-based active investment allocation mechanism, which is currently offered exclusively by SBI Life in India.

This IT-based system, developed by testing over 5,000 potential scenarios in the Indian equity and bond markets, determines the optimal risk-return combination.

Higher exposure to equities for the initial years, followed by increasing exposure to debt and money markets as the plan nears maturity, is automatically decided by this mechanism, to ensure better returns for investors.

In mature markets, out of total premium collected, traditional term policies account for 30-40 per cent. Why is the situation so different in India?

The Indian equity market is booming and most customers would want to be in on the party. For the time being, customers do not apprehend the downside in the equity markets.

It seems certain that when this downside happens, we will come back to the ratio between ULIP and traditional products similar to mature markets.

In SBI Life, we have introduced a profile score to help the customer in his decision to allocate his premium between equity and bonds. It is difficult to go against a market trend and customer requests. We have a wide range of traditional products.

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