ULIPs: Investment under new rules

Changes in ULIPs structure

There has been much discontent among the investors of ULIPs. Some of the reasons for this discontent can be attributed to investors’ ignorance and some can be to ULIPs sales people’s exaggerated claims on returns. The ULIPs fund houses have also been chided by SEBI for not maintaining transparency.

As a result, IRDA has come up with new rules for ULIPs structures. These changes are applicable since Sep, 2010. Some of the changes are:

Increase the minimum investment period: The minimum number of premium paying years and the lock in period has been increased to 5 years.

Even distribution and cap on the charges: The charges will be evenly distributed over the term of the investment. IRDA has also capped the charges on ULIPs.

Top up plans: The top plans will have cover of 125 per cent of the...premium below 45 years of age and 110 per cent of the premium for people above 45 years.

Surrender charges: IRDA has also reduced the surrender charges to 15 per cent in first year to 5 per cent in 5 th year with gradual reduction.

For pension products: IRDA has fixed a guaranteed return of at least 4.5 per cent. This is a great step.

Provision for loan against investment: The investors can now take a loan of 40 per cent of NAV value from an ULIPs fund with 60 per cent equity component while the loan can be 50 per cent if the equity proposition is 40 per cent.

How to make the best use of ULIPs

The financial market has many products and all of them are designed to fulfil a specific need of people. This applies to ULIPs as well. The investors need to understand the ULIPs...and its features to make the most of it.

First, invest for the long term and do not forget “insurance” part of ULIPs. ULIPs is market linked insurance-cum-investment product that will provide good returns in long term. Since market is generally volatile in short term, you should not expect immediate gains from it.

Second, ULIPs has many variants that can satisfy your needs. Look at the variants and see what suits you. A newly employed person can invest in aggressive plan while an old person may go for conservative plan.

Lastly, investors should also understand the charges and fee structure of ULIPs. This has been a major source of discontent. With new changes, the charges are easy to understand.