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INVESTMENT PLANS

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  • What is an Investment Insurance Plan?

    We all have known insurance since our childhood days. This is only getting bigger day by day. Almost everyone takes insurance to defend against uncertainty in life. Investment, on the other hand, is done to protect our future and build wealth for our future needs. Hence most of the financially aware people buy insurance to handle uncertainties in life as well as invest to build wealth for the future.

    In last few years, asset management companies have launched products that combine insurance and investment to provide the twin benefit of security against uncertainty as well as wealth building. These products are investment insurance plan.

    The most common one is ULIP or Unit Linked Insurance Plan. It is another matter that this product became notorious for miss-selling. The regulators had to intervene. Today, ULIPs are much better product than its earlier avatar.

    Investment insurance products
    Investment insurance products are financial assets that provide insurance and investment. For example, these products offer a sum assured in case of any eventuality. Moreover, they also invest a part of the premium in market linked securities to take advantage of market movement.

    How do investment insurance products work?
    So how do investment insurance products manage to do both?

    Coverage and growth: The premium that buyers pay is used to provide both of the aspects of investment and insurance. A portion of your premium goes towards providing the insured the necessary insurance coverage while the remaining portion is invested in market securities such as equities and debts. This is similar to mutual funds where the fund invests a pool of money collected from various investors in equities and debts in a specified proportion depending on the nature of the fund.

    Balance risk and returns: Investment in market securities offers various options based on risks and returns. Hence the buyer of investment insurance products has many options to choose from based on his or her individual risk appetite. Since debts are fixed income securities, they provide the stability of returns. Equities, on the other hand, do not promise any fixed returns but have the potential to give high returns over long term. Hence a combination of debt and equity provides much needed balance between the risk and returns.

    Choose what you want: Buyers have option to select the proportion of debts and equities where the money is going to be invested under his plan. If the buyer has long term investment horizon and is not risk-averse, he or she may select a plan with larger portion of equities. Similarly a buyer of low risk appetite may select a plan where the equity portion is lower and debt portion is higher. A person with medium risk appetite may choose a balance plan with relevant proportion of equities and debts.

    Important points for investors
    • Investment insurance products are financial products like any other. The suitability of this product depends on individuals’ needs. The product is not good or bad per se.
    • Every investment comes at a price. This price is known as brokerage fee, upfront and trail commission, and expense ratio. Hence investment insurance too has few expenses that are charged from customers’ premiums. Insurance products are known for their annual charges (not the premium) that are subtracted from your premium to pay the agent. This is an important aspect. Look at these rates carefully and compare the fee with other products to decide the right one for you.
    • Usually the charges in the first year I higher with gradual decrease every year till it get to a minimum amount below which the rates cannot decrease. Check for the commission because this is going to go from your investment.
    • Finally, investment insurance plan is little complex compared to regular insurance products or mutual funds. Look at all the important aspects such as sum assured, equity and debt proportion of your investment plan, and withdrawal rules, and the maturity amount before buying it.

    Some investors may want to separate investment from insurance. Hence they buy insurance to cover them and invest in equities, debts, gold, real estate, mutual funds etc. to cover for their future needs. Some may prefer investment insurance product because of ease of managing it.

    Finally, the choice is yours!

    Why should I buy Investment Insurance plan

    Investment and insurance are two different things, or so goes traditional wisdom. Hence, they should be treated separately. If so, why do companies launch investment insurance plans, which essentially combine investment and insurance in one product?

    Here we will discuss the four major benefits of investment insurance plan. This will help you decide whether it meets your needs.

    1. It is easier to manage track and update
    Since insurance and investment are bundled into one product, it is much easier to manage. In case of separate insurance and investment products, you have to manage them separately. Naturally, this requires spending more time on your investments.

    2. It serves the dual purpose of insurance and investment
    Investment insurance plan serves the twin purpose for any individual, namely insurance and investment. This not only provides insurance cover to the buyer but also invests in market-linked securities to take advantage of market movements and hence build wealth in the long run. This is achieved by dividing your premium into two parts. One portion goes towards purchasing insurance cover. This part is invested in risk-free or low risk assets so that they do not take unnecessary risk with insurance portion of the money. Remember that this insurance part has to provide you security in case of any eventuality. The other portion goes into investment in market securities such as equities and debt. The portion in market securities provides an avenue for wealth building for the long term.

    3. Insurance provides many choices for investment
    Investment insurance plans provide immense choice and flexibility to buyers. Dedicated plans like child plan, pension plan, etc takes care of your specific financial goals like children’s education and marriage expenses, retirement income needs, etc. There are various investment plans available based on proportion of equities and debt. A higher portion of equities in any plan makes the investment riskier but also increases the possibility of higher returns in the long run. Similarly, a higher proportion of debt reduces risk but also provides average returns on investment.

    Hence, buyers have many choices to choose from based on their risk appetite and investment horizon. A buyer with higher risk appetite and longer investment horizon may opt for investment into a scheme with higher proportion of equity and very low proportion of debt. A person with low risk appetite may opt for a scheme with higher proportion of debt.

    4. It provides flexibility to change the scheme
    The plan also provides flexibility to change your investment schemes in future if you find your chosen scheme is not suitable for you or did not meet your expectation. Hence, you don’t have to get stuck with a bad investment.

    For example, if you choose a plan for higher proportion of equities and found out later that you cannot manage the risk associated with it, you can switch over to a scheme with lower proportion of equities. This will be under the same investment insurance policy. If, however, you find that your choice of scheme with higher proportion of debt has not been able to take advantage of market rally in equities, you can switch over to a scheme with higher proportion of equity. In case of investments in mutual funds, if you have to change your investment scheme, you have to sell the current investment and invest in a new mutual fund.

    Finally, investment insurance products have grown in popularity in the last few years. The ease of operation, one product for investment and insurance, and flexibility with immense options for investment have made the product increasingly popular among investors. However, before you buy the product, carefully study the annual fee, sum assured, and investment schemes available.

    How does an Investment plan help at different stages of life
    From birth to death, our life passes through various stages, which has its own charm and challenges. The needs and responsibilities at each stage are unique and hence it requires various kinds of investment plans for a better lifestyle.

    While at some stages we are more concerned about ourselves, at other stages we worry about our dependants – in either of the cases strong financials can only help us sail smoothly through the rough patches of life.

    And to remain financially sound, proper investment according to life stages is very crucial.

    Why should one invest differently at different stages of life?
    Just think of you as a kid and then as a grown-up individual. Do you act the same way as you used to as a kid? As time progresses, our lifestyle changes, surroundings alter and to keep pace with this changing world. And to meet different needs, our financial capability should remain sound by virtue of proper investments.

    Various factors impacting our investment
    • Income matters – unless and until there’s enough cash flowing in, one won’t be able to invest
    • Age matters – risk appetite is inversely proportional to age. At younger age, one tends to take more risk with their investment portfolio.
    • Savings matters – start saving from day one of your earning, no matter how small it is.
    • Market matters – market trends and performances do matter and has direct or indirect impact on investments.

    Analyse your life stage
    It is imperative to analyse your life stage and your requirements. Set your priorities right and start investing accordingly. There are different financial products to aid your requirement in wealth accumulation and securing future for you and your dependants.

    Stage 1 : Unmarried young professional
    This stage of life is characterised by factors like – no financial dependency, high risk appetite, and long term investment, no major financial liabilities (home or car). Being a fresher without much work experience even if the earnings are low, start saving with smaller proportion and automatically it will grow into a bigger corpus over a period in time slowly and steadily.

    Investment avenues to be explored at this stages are mainly equities and term insurances. As the time is on your side, equity is the best option to generate high returns in the long run. Invest in ULIPs, which would give you the option to manage funds between equity and debt. Over and above its advisable to start early investment and enjoy the power of compounding. |

    Stage 2 : Married couple
    This stage of life is characterised by factors like – increase in expenses, addition of financial dependents, medium risk with average return, more into liquidity in order to meet expenses. It’s time to start creating a roadmap for financial planning and defining your goals. It can include buying a house or car, child planning etc.

    With increase in financial liabilities, the investment instruments to be sought after are building a robust insurance cover, build a contingency fund and make investments in traditional options like FD, PPF, NSC and SCSS to generate fixed returns. These may be insufficient to beat the inflation rate in the long run though. Invest in a term insurance to protect your family against life’s uncertainties and in case you already have one, enhance the coverage amount to ensure it is in sync with your current liabilities. You can go for a health insurance with family floater to cover your dependants too. Mutual funds are also a safe bet with a long term perspective.

    Step 3 : Being parents
    In this stage, financial dependents increases further more. Some of the other characteristics are high expense and less savings, low risk appetite with low returns, future planning for kids and well-being of family.

    Opt for a child ULIP to finance growing needs of the child and create a corpus to fund his education and career goals. Enhance the insurance cover that you already have. Invest in mmovable assets that can also help your kids later. Buy a good wealth plan that would help you various needs like child’s education, vacation planning, and bigger house. Availing a unit-linked pension plan won’t be a bad idea either.

    Step 4 : Retirement and golden years
    At the fag end of your life, reap all your investments, should focus on liquidity for daily expenses without any source of income. Risk appetite being very low, short term investments can be recommended.

    Create a separate contingency fund only for health emergencies, since old ages are vulnerable to illness. Rely on pension plans, SCSS and bank FDs for steady cash flow. However, make sure to be debt free before you retire, that will ease the burden and help you to lead a smooth retirement life.

    Best features which an ideal Investment plan must have

    The idea of investment is to create wealth for yourself as well as for your dependant, so that in days to come, there’s no financial hardship that one has to experience. Life is not all the same and there are ups and downs, a sound investment will shield those bumpy rides of life and provide you a secure future.

    Depending on your current lifestyle and to have a better future, it is imperative to have additional cash flow coming in that will support your family in your absence – be it child’s future, loan repayment, health issues. In such cases, the invested amount builds a corpus over a period in time to help you lead a stress free life. An ideal investment plan must comprehensively look into the following aspects.

    • Generate fixed regular income
    • Provide funds in emergency
    • Returns shall beat inflation
    • Should have satisfactory liquidity

    Above all these, an ideal investment plan should have coverage to provide protection agains uncertainties and unforeseen situations.

    Features of Ideal Investment Plans

    Investment Plans helps one to systematically build a corpus of funds to be available at emergency. However, the basic requirement is the rate of returns over the term of investments.

    Disciplined Investment: There are plans that bring in the desired discipline to invest with small yet regular sum, rather than a lump sum amount.

    Hassle free Investment: Linking investment portfolio with bank account makes it secure and hassle free, with standing instruction given to the bank, regular investment gets done automatically. KYC compliance is a must in this case

    Compounding Investment: The power of compounding helps to gain big, and hence one who starts early benefits much better way than late starters. Also return of one investment can go in as an investment to another better and bigger plan.

    Easy Investment: Mostly online plans that gets issued quickly with less paper work. Most effective and convenient way to remain invested.

    Types of Investment Plans

    Besides elevating income, a well thought investment plan can help you channelize your savings into the most apt instrument for better returns, thereby building a corpus for financial security.

    • Life Insurance policies – This offers dual benefit of life protection as well as investment for building a corpus. Depending upon the risk appetite and financial commitments, one can opt for traditional plans, which offers stability and guaranteed returns, or a unit-linked policy with high returns and elevated level of risk.
    • Equities – These are company security that can be traded in stock market or via IPO subscription. Investing in blue chip companies for a long term can generate high return and handsome bonuses.
    • Bonds – These are mostly fixed income instruments issued with the aim of raising capital for a specific motive. They can either be issued by Government bodies or private entities, the ones issued by government comes with low risks and fair return.
    • ULIPs – Completely dependent on market performances, these policies can be invested in a variety of funds including equity, debt and hybrid, according to the risk taking ability
    • Mutual Funds – The most cost efficient and highly diversified means of investment. Innumerable number of MFs is available to choose from, depending on risk and return probabilities.
    • Bank Deposits : This is the safest means of securing steady return. The returns are low but stable.

    Top 10 online Investment Insurance Plans in India
    Life insurance has evolved from being primarily a protection instrument to an instrument offering an investment option. Here is a look at the top online investment insurance plans that offer a dual benefit of investment cum protection offerings.

    1: SBI Life Smart Wealth Assure
    SBI Life Smart Wealth Assure plan is a popular unit linked plan offering both protection as well as investment instrument for the policyholder. The plan offers the option to choose from a mix of funds namely bond fund and equity fund offering market linked returns. Partial withdrawals are allowed after the 5th policy year along with a benefit of customizing the accidental death benefit option. SBI Life Smart Wealth Assure plan is a single premium plan where premium is invested in funds after deducting the premium allocation charges.

    https://www.sbilife.co.in/en/individual-life-insurance/ulip/smart-wealth-assure

    2: PNB Metlife Smart Platinum
    PNB MetLife Smart Platinum is a unit-linked insurance plan. The plan allows for attractive investment returns as it offers the policyholder to choose from 6 fund options with varying risks. PNB MetLife Smart Platinum plan offers partial withdrawal options from the 5th year offering insurance cover up to 99 years. The maturity benefit is equal to the total fund value on maturity date.

    https://www.pnbmetlife.com/insurance-plans/wealth/metlife-smart-platinum.html#parentHorizontal Tab|parentHorizontalTab1

    3: Bajaj Allianz Future Gain Plan
    Bajaj Allianz Future Gain is a popular unit linked endowment plan offering the policyholder a choice of two investment portfolio strategies. As a market linked plan, Bajaj Allianz Future Gain gives the policyholder to switch between a choice of seven funds with an option for partial withdrawals and decreasing of Sum Assured. Maturity benefit on offer under the plan is the regular premium fund value plus top up premium fund value as on the maturity date.

    https://www.bajajallianzlife.com/ulip/future-gain.jsp

    4: Aegon Life iMaximise Secure Plan
    Aegon Life iMaximise Secure Plan is a unit linked plan offering insurance cum market linked returns for the policyholders. The policy allows the option to choose from 6 unit linked funds as per the investment needs of the policyholder. The plan pays out an amount equal to the annualized premium to the nominee as income benefit till maturity in case of unfortunate death of the Life Assured.

    https://www.aegonlife.com/insurance-plans/ulips/aegon-life-imaximize-insurance-plan

    5: ICICI Pru Life Time Classic
    ICICI Pru Life Time Classic is a new unit linked plan that offers the policyholder extensive wealth creating options while safeguarding the protective component. The plan offers the policyholder the option of choosing from 5 Equity funds, 2 Debt funds and 2 balanced funds to get better returns for each individual. With 4 free switches in a policy year, the ICICI Pru Life Time Classic plan offers loyalty additions, top up facility and flexible premium payment options.

    https://www.iciciprulife.com/ulip-plans/icici-ulip-lifetime-classic-plan.html

    6: SBI Life e-Wealth Plan
    SBI Life e-Wealth Plan offers market linked returns making it one of the popular unit linked insurance cum investment plans. SBI Life e-Wealth Plan comes with two plan options of Growth and Balanced with nominal premium payments without any allocation charge. The plan also allows for partial withdrawals from 6th policy year. For policyholders without having any proactive financial insights, the plan offers an investment management through automatic asset allocation.

    https://www.sbilife.co.in/en/online-insurance-plans/ewealth-insurance

    7: HDFC Life Pro Growth Plus
    HDFC Life ProGrowth Plus is a well known and popular savings-cum-insurance plan. As a unit linked plan HDFC Life ProGrowth Plus allows the freedom for policyholder to choose from various funds like income fund, balanced fund, blue chip fund and opportunities fund to make the most of market oriented returns. The plan comes with flexibility to choose sum assured and an EMI option for HDFC Bank Credit Card holder. The plan offers both maturity and death benefits with the options of changing fund choices by moving unlimited times from one fund to the other.

    https://www.hdfclife.com/savings-investment-plans/progrowth-plus-ulip-plan

    8: Tata AIA Wealth Maxima
    Tata AIA Wealth Maxima is a unit linked plan tailor made to offer a perfect communion of protection and investment components. The plan allows the option of premium payments for one year and insurance cover for life. The policyholder can choose from 11 fund options for enhanced investment opportunities. There is also a choice of enhanced systematic money allocation and regular transfer investment portfolio strategy. Tata AIA Wealth Maxima also offers tax benefits u/s 80C and 10 (10D) of the Income Tax Act, 1961

    http://tataaia.com/pdf/wealth-solutions/tata_aia_life_insurance_wealth-maxima_brochure.pdf

    9: Max Life Fast Track Growth Fund
    Max Life Fast Track Growth Fund is a unit linked plan offering good investment options with its market linked returns. The Max Life Fast Track Growth Fund allows option to choose single pay or 5 pay for 10 years policy term or regular pay for 20 years policy term as per your need. The plan offers policyholder to choose from 5 fund options as per the underlying investment risk appetite. The plan comes with two inbuilt strategies of Systematic Transfer Plan and Dynamic Fund Allocation to safeguard against market volatilities.

    https://www.maxlifeinsurance.com/Plans/ insurance-plans/growth/fast-track-super.aspx

    10: Kotak Platinum Plan
    Kotak Platinum Plan is an ideal insurance cum investment product offering the dual benefits of adequate protection and market linked returns. Kotak Platinum Plan allows policyholders to choose between 3 unique investment strategies to ensure maximum returns. The maturity benefit offered in the Kotak Platinum Plan is the fund value on maturity date along with any fund value in top up accounts.

    https://insurance.kotak.com/insurance-plans/savings-and-investments-plans/kotak-platinum-plan


    Online Investment insurance plans at a glance
    Investment cum Insurance Plan Entry Age Minimum Premium Minimum Basic Sum Assured Premium Allocation Charges Free Switches on offer Policy Term Premium Payment Term (PPT)
    SBI Life Smart Wealth Assure 8-65 years for base plan Rs. 50,000 Age below 45: 1.25 x Single Premium Age above 45: 1.10 x Single Premium 3% of Single Premium 2 free switches in one year 10-30 years Single premium policy
    PNB Metlife Smart Platinum 7-70 years Rs 30,000 for Annual mode Rs 60,000 for other modes -- 1% to 1.25% as per fund option 4 -- 5 pay/ 10pay/ entire term of the policy
    Bajaj Allianz Future Gain 1-60 years Yearly: Rs. 25,000 Half yearly: Rs. 12,500 Less than 45 years: 10 times Annualized Premium or 0.5 * Policy term * Annualized Premium Greater than or equal to 45 years: 7 times Annualized Premium or 0.25 * Policy term * Annualized Premium 0-1.5 % unlimited 10 years 5-30 years
    Aegon Life iMaximise Secure Plan Benefit option 1: 7-55 years Benefit option 2: 18-50 years Option 1: For Premium Payment Term: 5 / 7 years: Rs. 36,000 For other Premium Payment Terms: Rs. 24,000 Option 2: Rs: 24,000 (Entry Age < 45 years) Rs: 36,000 (Entry Age >= 45 years) For entry age below 45 years Higher of the Following:
    • 10 times the Annualized Premium
    • 0.5 x Policy Term x Annualized Premium For entry age equal to or above 45 years Higher of the Following:
    • 7 times the Annualized Premium
    • 0.25 x Policy Term x Annualized Premium
    Nil 4 15,20, 25 years Option 1: 5,7,10, 15, equal to policy term Option 2: 10,15, equal to policy term
    ICICI Pru Life Time Classic 0-65 years Single Pay: 50,000 Limited Pay and Regular Pay:30,000 0 - 38 Years: 1.25 X Single Premium 39 Years and above: 1.25 X Single Premium 3-4% 4 5 years, 10 years, single pay --
    SBI Life e-Wealth Plan 18-50 years Yearly: Rs. 10,000 Monthly: Rs. 1000 10 times Annualized Premium Nil -- 10-20 years Regular
    HDFC Life Pro Growth Plus 14-65 years Annual: Rs. 24,000 Half Yearly: Rs. 10,000 Monthly: Rs. 2500 Age less than 45 years: Higher of 10 x annualized premium Age more than 45 years: Higher of 7 x annualized premium 2.5% of annual premium Unlimited 10-30 years 10-30 years
    Tata AIA Wealth Maxima 0-60 years Single Pay: Rs. 5,00,000 per annum Limited Pay: Rs. 2,50,000 per annum For Single Pay: 1.25 times the Single Premium For Limited Pay: Higher of (10 * AP) OR (0.5*Policy Term* AP ) 3% 12 100 minus Issue age 7/8/9/10/15 and 20 years
    Max Life Fast Track Growth Fund 18-60 years Single Pay: Rs. 1,00,000 5 Pay: Rs. 50,000 Regular Pay: Rs. 25,000 Single Pay: Rs. 125,000 5 Pay: Rs. 500,000 Regular Pay: Rs. 250,000 0-4% 12 10 years for Single Pay/5 Pay and 20 years for Regular Pay Single Pay/ 5 years (5 Pay) / 20 years (Regular Pay)
    Kotak Platinum Plan 0 to 65 years Minimum: Annual: 99,000, Half-yearly: 49,500, Quarterly: 24,750, Monthly: 8,250 Less than 45 years: Higher of 10 times AP or 0.5* Policy Term * AP 45-60 years: Higher of 7 times AP or 0.25* Policy Term * AP 61 years and above: 7 times AP 1.5% to 5% 12 10 to 30 years Regular: Equal to the policy term. Limited: 5-year payment with policy term of 10 years | 10-year payment with policy term of 15 to 30 years

    Useful Tips to buy Investment plan in India
    The insurance sector today is flooded with a plethora of investment plans offered by insurance companies and asset management companies. Pension plans, child plans, endowment plans, and general life insurance plans are few of the most popular ones. Apart from this, there are number of add-ons which can be taken along with the main plan for individual needs of the investors.

    All the investment plans vary from one company to the other. For example, pension plan from one company can differ from a pension plan scheme floated by another.

    We outline some tips to buy investment plans like pension plan, child plan, and unit linked insurance plan (ULIP). All these plans combine insurance and investment so that you not only get the protective coverage but also build wealth for future use.

    Tips to buy a pension plan
    Start early: For pension plan, it is better to start as early as possible. Since pension plan is for your old age, you need a large sum of money that can carry you through your old age. The investment horizon or tenure of your investment plan plays the most important role in building wealth. Compounding your money for a few years more can make a huge difference in the corpus built over time.

    Decide the vesting age: Vesting age is the age at which you start receiving money from the insurance companies as annuity. Decide the vestige age based on your health and financial condition. If you are active and have desire to work for a few more years after the retirement age, choose a higher vesting age. The vesting age can be anywhere between 40 years and 70 years. In some cases, this can go up to 75 years too.

    Check withdrawal options: Check the terms and conditions regarding the percentage you can withdraw at one go before choosing a plan. Many times, people plan to build a home after retirement or go for extended travel. Having a high withdrawal limit may help in such cases.

    Get maximum returns: Since pension plan is for the long term, you may want to look at a plan that invests a part in equities, as equities can give great returns over long term.

    Tips to buy a child plan
    Check for partial withdrawal options: A child plan is mainly used for higher education of children after they are ready to go to professional college. However, if you need money for coaching or for any other purpose, you may want to look at partial withdrawal option given in the child plan. Partial withdrawal helps you ride over expenses that may occur before the maturity.

    Get maximum returns: Child plans offer variety of options based on your risk appetite. If you have higher risk appetite, you may choose a plan that invests significant part in equities. If you are risk averse, consider simple endowment plans.

    Ensure waiver of premium option: Child plans also offer premium waiver feature, which is very important. This feature ensures that the payment of premium never stops even when the guardian or the payer dies.

    Tips to buy ULIP
    Choose a plan based on your risk appetite and objective: Unit linked insurance plans are another type of investment plans that provide insurance along with investment option. ULIPs offer many schemes based on proportion of equity and debt. A higher portion of equity induces higher risk in your investment but also offers potential for big returns in the long run. Similarly, higher proportion of debt provides stability in your investment but returns are average to low. So before investing in ULIP, analyse your risk appetite, objective of investment, and investment horizon.

    Important general tips while buying investment plans
    • The most important aspect of any investment is rate of return on your money. Most of the plans explain the future value of your investment at a certain rate of return. This will give you an idea of how much you can expect to have at the end of the maturity. You can also speak with your agent or anyone from your friends & family about the return they got from similar products, but remember that past performances of any asset class is never an indicator of future performance.
    • All investments incur some fee, which is deducted from your investment. These charges are annual in nature. Every year, a portion of your premium is deducted to pay the commission. This commission keeps diminishing year after year and becomes constant after 2 to 5 years. All the charges are mentioned in the brochure of the scheme. Look at these numbers and decide.

    Consider the above tips before deciding to buy an investment plan. It will save you from unnecessary expenses and headaches in future.

    What are the eligibilities for having an Investment plan
    Each investment plan intends to achieve an objective and hence each plan has some eligibility criteria so that it justifies the intended objective. In this article, we will discuss the eligibility criteria for various investment plans.

    Pension Plan
    Entry age (minimum and maximum): Entry Age is 20 years to 60 years. There are two variants of pension plan. One is single premium and the other is regular premium, i.e. premiums are paid every year till the vesting age. Vesting age is the age at which the pensioner starts receiving the pension. In case of single premium, the maximum age can be a little more than the maximum age in case of regular premium. For example, in one such pension plan in the market, the maximum age for entry into a single premium is 60 years while the same is 58 years in case of regular premium.

    Vesting age: Vesting age can be a minimum of 55 years and a maximum of 65 years. This is the age at which most of the people retire from active working life. Hence, their source of income would have dried up. This is the time a pension plan comes into effect and provides regular annuity for regular expenses.

    Child Plan
    A child plan is a little different because it has two entities involved in the plan. One is the child for whom the plan is taken and the other is the proposer. There are eligibility criteria for both.

    Entry age (Minimum & Maximum): While the entry age differs for different insurance companies and for different schemes, the entry age of the child can be anywhere between 0 and 17 years. So the maximum is before the child gets adulthood at 18 years. Similarly, the proposer can be an adult. So the age can be anywhere between 18 years and 60 years.

    In ULIP-based child plans, the entry criteria for child is 0 to 17 years while the same is 0 to 13 years for traditional child plans. Similarly, the age of parent or proposer can be anywhere between 18 to 57 years for ULIP-based schemes, while it can be 21 to 50 years for traditional child plans.

    The policy term can be 21 or 25 years minus the current age of the child. The maximum maturity period can be till the age of 65 or 70 for the proposer depending upon the plan.

    Minimum premium: The minimum premium varies with schemes and vendors. For example, one insurance company has put Rs 18,000 per year as its minimum premium for a child plan.

    Unit Linked Insurance Plans (ULIPs)
    Entry age (Minimum & Maximum): For ULIP, the minimum entry age is 18 years and maximum age of entry is 50 years. The policy term can be anywhere between 10 and 20 years.

      Entry age (Minimum & Maximum)
    Pension Plan 20 years to 60 years
    Child Plan 0 and 17 years for the child and 18 to 57 years for the proposer
    Unit Linked Insurance Plans (ULIPs) 18-50 years

    In most of the investment plans, the minimum premium needed is usually low. This is done to ensure that the plan covers a large mass of investors. Investors should check with individual plans for minimum amount needed to start an investment plan.

    Advantages of an Investment Plan
    It is a known truism that insurance plans secure the buyer’s future financial needs in case of any eventuality. There are products that are pure insurance products, such as term insurance. Then there are products that are insurance cum investment products. Insurance products like ULIPs and endowment plans can be taken as investment cum protection plans. Some of these plans assure a guaranteed return, which is essentially a range of returns that an investor can hope to realize.

    Here, we will look at 4 major advantages of investment plans and how they help you manage your finances and future needs.

    1. Investing in insurance allows a variety of plans for different objectives
    Insurance companies have myriad investment products for different needs of investors. For example, a child plan takes care of the education needs of your child, while a pension plan helps you to receive a constant sum periodically in old age when you are deprived of regular income.

    Within various insurance plans, there are different variants such as traditional plans, endowment plans and market-linked plans. Traditional plans are more conservative while market-linked plans invest in market securities and hence riskier. However, the potential of better return is higher in a market linked plan.

    ULIPs, as the name suggests, are unit linked insurance plans, which offer immense variety of options. There are conservative ULIP plans, which invest almost their entire corpus in low risk debt securities, assuring a fixed returns to investors. There are also ULIPs that invest a major part of the corpus in equities, and hence risky, but with the potential of higher returns. Moreover, each of these plans come with additional features or riders/add-ons, which can be added to the main plan by paying little extra premium. For example, you may even add accidental covers in your child plan.

    2. Insurance offers products for different types of investors
    Investors usually are categorized based on their risk appetite. Aggressive investors who have high risk appetite can invest in products such as ULIP with higher proportion of equity. Similarly, an endowment plan is for investors with a low risk appetite.

    Most of the insurance products, which are not term insurance, are essentially investment plans. For example, life insurance schemes promise a sum assured as well as bonus. This bonus comes out of the returns that your premium achieves by investing in different assets. Usually, endowment plans invest in low risk assets such as Government securities, high grade corporate bonds, or deposits.

    3. It serves the twin purpose of investment and insurance
    Investment plans serve the dual purpose of investment and insurance. Investment plans do have a sum assured that is paid at the death of the insured before the maturity. This is a feature unique to insurance. For example, ULIPs use your premium to provide insurance cover, but the premium you pay is invested in market securities such as equities and bonds.

    4. Insurance offers flexibility of withdrawal
    Most of the investment plans have withdrawal features, which allow investors to withdraw a certain percentage of the investment. This can happen after few years. This helps investors ride over any temporary need of money because of any medical emergency, sudden need of money, or any financial failure.

    In conclusion, investment plans are tailor made for individual requirements. Investors can choose based on their future needs and capacity to pay premium.

    What are the different types of Investment plans in India?
    The investing space in India offers myriad options in terms of asset classes for investors. The options can vary based on risk appetite, from conservative investors to aggressive investors. It can vary based on sectors, market capitalization, location, foreign portfolio, as well as Government securities and simple bank deposits.

    Insurance firms too offer various investment plans for investors. In fact, investment plans from insurance companies have been the oldest offers in the Indian investing arena.

    We outline some of the most popular investment plans and their types here.

    Pension plan
    Pension plans are for the future. The investor pays annual premiums for a number of years, which grow into a significant corpus. This is used to pay the investor back in the form of annuity, i.e. periodic payment, usually monthly, when the vesting age starts.

    Vesting age is the age at which you plan to receive the annuity payment from the insurance company. It may also include a lump sum as percentage of the value of investment. This is also known as retirement plan.

    Pension plans are important for your old age. While most of us have employee provident fund schemes where a part of our income goes into them, pension plans provide the extra cushion to deal with sudden expenses, especially when costs are rising. Hence, it is always good to have multiple annuity plans.

    All insurance companies offer pension plans, which differ in where they invest. These plans invest in a combination of equities and debts. A higher proportion of equity makes the scheme riskier but also has potential to give high returns while a higher proportion of debt makes the returns more stable but average.

    Almost all insurance companies provide online option to buy pension plan. It is convenient as well as cheaper to buy than offline option. The schemes offered are identical, though.

    Child plan
    With the rising cost of education, parents are concerned about the cost of professional degrees when their children turn adults and attend professional universities and colleges. Child plans come to their help in such situations.

    A child plan is a scheme where the guardian or parents pay annual premium for a scheme, which grows by the time the child is ready to go to college. Child plans offer various features such as partial withdrawal where the buyer can withdraw certain percentage of the sum. This feature helps when you need money before the maturity.

    Child plan offers variety of options for different types of investors. The schemes underlying child plans invest in a mix of equities and debt in different proportions. An aggressive investor with high risk appetite may choose the scheme with higher equity proportion while a conservative investor may choose a plan with higher debt proportion.

    The most important feature of a child plan is waiver of premium benefit, which doesn’t let the policy lapse in case of death of the policy holder. The insurance company pays the premium till the maturity of the policy. This insures that the child gets the benefits for which the insurance was initially taken.

    To understand the benefit of this feature, suppose a child plan mentions that the money back policy will happen when the child reaches the age of 18 and 23. Hence, even when the parents are no more, the money back will occur at the stipulated time so that the child doesn’t face any problem in his or her education. Waiver of premium feature ensures that the policy continues as it would have had parents been alive.

    Child plans can be bought online or through an agent. Most of the insurance companies offer child plans online. Buyers can simply create an account and buy it online at the convenience time and place. If you need the plan and its features explained personally, it would be better to go through an agent.

    Unit Linked Insurance plan (ULIP)
    An ULIP is another type of investment plan which is unique in a way that it combines insurance and investment under the same scheme. ULIP is a general investment plan for wealth building as well as insurance coverage unlike pension plan or child plan where they serve a specific purpose only.

    This dual benefit is achieved by diverting a part of the premium for insurance coverage while the other part goes into investment for wealth building. ULIPs offer many choices for different types of investors. As mentioned above in other cases, the schemes invest in a mix of equities and debt in different proportion for different types of investors. Investors can choose the plan based on their investment horizon and risk appetite. The most attractive aspect of ULIP is that investors can change the scheme if they do not find their earlier selection serving their purpose.

    Conclusion
    The above are some of the typical investment plans offered by the insurance companies in India. There are others such as endowment plans and general insurance, which are essentially insurance and investment in low risk bonds. These provide immense stability to the investment but the returns are poor. The reason is obvious. Since the companies have to provide sum assured in case of death irrespective of how many premiums are paid, they cannot take risk by investing in equities. Hence, the money goes into fixed income securities such as Government securities, high grade corporate bonds, and bank deposits. Moreover, in these cases, insurance coverage is more important than investment unlike in the above mentioned cases where investment is the key theme. Hence, it is also important to define your purpose before you buy investment products.

    How my premium is calculated while buying an Investment plan
    Premium calculation, to many, sounds like rocket science. When you want to know your premium, the online premium calculator screen shows a simple screen where you punch in some information and press submit. Then it does some esoteric calculation in the background while you hold your breath, and then shows a premium amount, leaving you wondering how the number has come up.

    You can find all types of information on investment plans, but it is rare to find a dissection of premium calculation. Here, we discuss this aspect of insurance and investment plans.

    First, insurance premium calculation differs for each company. This is what makes it confusing for investors. It is difficult to fathom how one company can charge different premium for similar benefits because at the end of the day the benefits are what you are purchasing.

    Factors beyond your control
    Administration and other associated costs: An insurance company is just like any other firm where you have different departments that help run the company. They help manage the investment, do the paperwork, process new application, update the various schemes, launch new products and schemes, process the claim, collect premium, pay sum assured, and perform many tasks that go into the background to make investment possible. Needless to say, all these tasks are done by resources for which the company has to spend money.

    This is where the difference in premiums arises in different insurance companies for the same sum assured and features. However, it doesn’t mean that higher premium is bad. Suppose a company has many branches even at smaller towns. Naturally, this will incur higher cost in running the organization. This will result in higher premium for the policy holder. But look at the brighter side. It will be easier for the policy holder to deal with the company and help in claim processing.

    There can be other factors such as efficiency of operation. An efficient company that leverages technology incurs lower cost of operations, which reflects in your premium. This is why you see online insurance plans cost you lower than the offline ones.

    Factors in your control
    Sum assured: Obviously, this is the most important factor. The sum assured is what you get for certain at the end of the maturity or in case of any unfortunate events when the policy is in force. A higher sum assured means a higher premium for the policy seeker.

    Age of the buyer: The age of the buyer is an important factor in determining the premium. For a plan with similar sum assured, a buyer of higher age will have to pay a higher premium. This is why it is always better to take insurance or investment plan when you are younger. Not only does it cost you less but also the magic of compounding makes your wealth much bigger in the longer run.

    Length of cover: The length of cover affects the premium. For the same sum assured, an investment policy for a shorter tenure will come at a higher premium than a plan for longer tenure.

    Add-ons / Riders / features: The presence of add-ons or riders can inflate your premium as each add-on comes at a price. Similarly, features such as money back facility, partial withdrawal, flexibility to change the scheme etc. are some of the factors that affect your premium.

    Health condition and habits: This is applicable in investment plans that also involve insurance coverage. Your health condition affects the premium paid for the policy. A healthy lifestyle reduces the premium as the possibility of death drastically reduces. There is a reason why investment forms ask you to mention your habits such as smoking, alcohol, etc.

    Moreover, any existing critical disease or presence of certain disease in your family can increase your premium further.

    Your work conditions such as a job in hazardous industry can make your premium go up. Industries such as mining, nuclear energy etc. increases the possibility of accidents. These can add to your premium. Now, with the advent of new technologies and safety measures, these factors may not count for much in determining your premium.

    Conclusion
    The above factors impact the annual premium that is payable against your investment plan. Premium is directly proportional to the benefits—whether direct or indirect and whether monetary or non-monetary—you receive from the insurance company. At the same time, add-ons have become a common feature as many people prefer to customize their plan based on their specific situation. Hence, always analyze the factors in your control before you buy an investment plan.

    What are the rates of returns in Investment Plans?
    The purpose of any investment is to earn returns, which accumulate to build wealth for an objective. The objective can be for the long term or for the short term. We look at the typical investment plans and their possible returns. While these are just guidelines and indicative figures, the actual returns may vary.

    Pension plan
    The rate of return in pension plans depends on the underlying assets that the plan invests in. Most of the pension plans in the past used to invest in low risk assets such as Government securities and high grade corporate bonds. These assets provide average returns.

    Typically, a pension plan investing in low risk securities should provide you anywhere between 5% and 7%. If you look at the brochure of the pension plan, there are two set of data shown. One is based on an assumed return of 6% while another based on 10%. The difference in the maturity amounts is substantial.

    The new pension plans have become more aggressive in their approach. They invest a part in equity and a part in debt. Usually, pension plan from fund houses fall in this category. The portion of equity investment can be anywhere between 40% and 80%. A high proportion in equity increases the risks associated with the investment but it also increases the prospects of higher returns. The problem with equity investment is that you cannot correctly predict the returns. However, in the long run, equities beat every other asset.

    A pension plan high on equity proportion may give a return of 8-15% or even more depending on the performance of equities or mutual funds underlying the plan. Investors with high risk appetite and long term plan should opt for such schemes.

    Child plan
    Giving good education to their child is a fond dream of most parents. A good education entails a better future. Hence, parents want their children to pursue professional education in the best colleges and universities. Since it costs enormous amount of money and it is only going to increase, parents are increasingly looking at child plans to save for their child’s education.

    Since the returns depend on the underlying assets (equities, debt, bank deposits, or mutual funds), child plans with equity exposure have no fixed rate of return.

    The returns in a child plan investing a major part of the premium in equities may expect to earn anywhere between 8% and 15% as mentioned above. As the exposure to equity decreases, the average return over the long run may go down. At the same time, reducing equity exposure will also reduce the risk inherent in equities.

    So before choosing a child plan, look at the underlying asset mix and analyse your risk appetite. The equity market is inherently risky. If you get a return of 50% in a year, you may get a negative return in another year. How volatile the equity market is can be gauged from the fact that the Sensex gave -40% returns in 2008-2009 and 80% in 2009-2010. It gave -11% in 2010-2011 and 25% in 2014-2015. However, if you look at the CAGR of the last 36 years, it is closer to 18% which shows better returns in the long run.

    Unit Linked Insurance Plan (ULIP)
    ULIP is another investment plan that also provides insurance coverage. ULIPs were very popular before the market crash in 2008. The crash of the market brought down the ULIP’s value along with the market, which of course brought to the fore the core issues of ULIP as a product. The regulators interfered and changed the structure of ULIPs. Currently, it is much better investment option.

    Since ULIPs provide both insurance and investment, a part of the premium is utilized in proving insurance coverage, while the rest goes into investment. ULIPs follow a similar structure as any other investment plan. The underlying assets are equity and debt. The returns depend on the mix of equities and debt.

    Finally, all the investments where equity exposure is significant are subject to market risk. If the market does well, your investment will do well. However, in the event of a subdued market or a market crash, the value will go down. Investors should be aware of the risks associated with any product with significant market exposure.

    How maturity amount can be calculated in Investment plans
    Making an investment plan is not only about choosing the right investment vehicle, but involves a number of factors to ensure adequate returns. Calculating the maturity amount beforehand is, therefore, one of the essential parameters for selecting any investment plan.

    With a number of investment options available today, every financial instrument has its own merits and demerits. The maturity amount is calculated as the amount that will be paid back to you as an investor upon maturity of the investment plan.

    General rule to calculate maturity amount for compounded interest investment options
    If you have invested in a financial instrument offering an annually compounded interest, the below steps can help you calculate the maturity amount for your investments.

    • Know the details of your investment including amount, rate of interest, and the tenure of the investment.
    • Create an interest multiplier value by dividing the interest rate by 100 and adding 1 to it. For example, for a rate of interest of 9%, the interest multiplier will come to (9/100) + 1 = 1.09
    • Multiply the interest multiplier with your principal amount to calculate total maturity amount for the year. For example, maturity for a Rs. 5000 investment for 1 year at 9% rate of interest will be calculated as: 5000 * 1.09 = Rs. 5450.
    • Keep multiplying with the interest multiplier for successive years till policy term for final maturity amount.

    Calculation of maturity amount for insurance cum investment offerings
    There are multiple options if you are looking at insurance cum investment plans. The maturity amount will depend on the type of plan, the investment period, the amount of premium being paid for investment, etc.

    Investment Plans, for example, offer no maturity benefits as they are pure insurance plans.

    Endowment insurance plans, which are traditional plans, offer a guaranteed return as part of their investments in safe government instruments and securities. The average rate of return can vary from 4% to 8% for such endowment plans investing in the debt market.

    The benefit illustration charts listed on the insurer’s website is a good way to understand the possible maturity offerings as per the insurance premium being paid. Unit Linked Insurance Plans or ULIPs offer market-linked returns and calculation of the possible maturity component may not always reflect the actual returns offered.

    Tips to calculate maturity returns of insurance cum plans
    • Read the policy terms and conditions carefully to understand all charges being levied by the insurer.
    • The final premium to be considered for maturity benefit calculations is the premium paid minus the fixed charges. For example, some plans seek a fixed percentage of maturity benefit as bonus for some limited tenure.
    • Subtract all such charges to arrive at the final invested premium component.
    • Add to it any interest or bonus if applicable for your plan.
    • Interest and bonuses are usually guaranteed additions but also consider any variable additions as per your investment plan.
    • Make use of maturity calculators on various insurance broker platforms to get an insight on the maturity returns as per your premium paying amount.

    Can Investment plan gives guaranteed returns
    Investments and certainty seldom go together. This is the reason why when any investment product offers assured or guaranteed returns, it comes on the investment radar of majority of investors. In the financial world, not many products offer assured returns. The one basic reason is the popularity of investments in market-linked instruments that have the capacity to offer higher returns.

    Investors are usually on the lookout for higher returns. But “higher the risk, higher the reward” is a golden rule in the world of financial investments.

    In the world of insurance cum investment instruments, there are plans that offer guaranteed returns on investment. But since only a limited amount of premium money is allocated for investment and some of the invested money in put in low risk assets, the returns of such plans are low. A majority of the premium money is used to offer the protective cover as sum assured, which is the primary goal of any insurance offering.

    Endowment plans and guaranteed returns
    For those seeking insurance cum investment with assured returns, endowment or guaranteed returns plans are a popular investment offering. While endowment plans offer maturity benefits along with accumulated bonuses at the end of the policy term, the overall yield may not cross more than 8% per annum.

    Now considering the fact that endowment plans usually have tenure of 15 to 20 years, the 8% per annum assured returns may not always be able to beat the inflation. Investing the same amount in a good unit linked insurance plan or an equity mutual fund is likely to generate higher returns albeit with a higher risk element than assured returns plans.

    ULIPs and guaranteed returns
    Unit Linked Insurance Plans (ULIPs) offer market-linked returns, so the risk of investment has to be borne by the policyholder. A medium- to low-risk investor can either opt for endowment plans or switch the ULIP investments to a 100% debt fund plan for safer returns on an average.

    The insurance regulator Insurance Regulatory and Development Authority of India (IRDA) has however introduced a minimum guaranteed return of 4.5% on Unit Linked Pension or Annuity Plans.

    Investment cum insurance plans and guaranteed returns at a glance
    • Endowment insurance plans offer low risk investments along with an insurance component.
    • A certain part of premium is fixed towards sum assured as an insurance tool. Only a limited part of the premium goes towards investments.
    • Endowment or guaranteed returns plans may declare an annual bonus as a part of sum assured or life cover.
    • Unlike mutual fund dividend, bonus is paid only at the end of the policy term or in the event of death of the policyholder.
    • In most cases, bonuses declared every year just add up and do not compound annually lowering the final pay-out of bonus substantially. But bonuses are not liable to be declared every year.
    • The average rate of returns in most endowment or guarateed return plans vary from 4 to 8% at best.
    • For ULIPs, 4% is guaranteed, but good performing equity plans may even offer over 10% in the long term.
    • The returns are lower because large part of premium is fixed for protection component.

    What is the right amout to invest in an Investment insurance plan
    Ravi, 32, has been working in an MNC for the last five years. A monthly salary of Rs. 70,000 leaves a surplus of around 25,000 after taking care of Ravi’s expenses. He is currently single and looks forward to invest in an insurance-cum-investment plan as he wants a life cover as well as a corpus for retirement. He can go for an endowment plan or ULIP to achieve his dual target, or he can buy separate plans with focus on insurance and investment respectively.

    Assuming he chooses the former kind, what is the right amount for Ravi to invest?

    Factors determining the quantum of investment
    Cover: How much to invest depends upon the cover required. Ravi will need a foresight to determine the right cover for his life, which will become more valuable with addition of dependents once he marries. This in turn requires estimation of a replacement income for his dependents. He can do an asset-liability analysis to determine the replacement income. A rule of thumb is to have a cover equal to 10-15 times one’s annual income.

    Age: The amount of investment required is obviously related with age. The younger a person, the longer he will need to invest. And the longer the term of investment, the lesser the premium.

    Monthly Income: One of the limiting factors of investment is monthly income. How much one can afford to invest each month does not have a set rule. There are, however, indicative formulae which can be applied to determine a lower and upper limit of investment. While the amount of cover determines investment from insurance perspective, the targeted corpus also influences investment. To build a retirement corpus, one goes by the ‘halve your age and invest an equivalent percentage monthly’ axiom. An upper limit of 20% of your monthly income is generally advised to keep it comfortable. However, the upper limit depends upon the size of monthly income as well. If the monthly income is high, one can invest more.

    Dependents: Since an investment cum insurance plan is also an insurance plan, how much to invest also depends upon the number of dependents the cover is sought for. Larger number of dependents will need a larger replacement income, translating into a larger cover and hence greater investment.

    Inflation: Inflation is a real spoilsport and one cannot afford to ignore it while planning for the future. Ignoring it will distort all equations and calculations, and may lead to a shortfall in availability of funds at a future time. It is advisable to keep a margin of 5% for inflation in all investment calculations. Since insurance investment policies are long term, one must especially factor in inflation before calculating how much corpus on would need at the time of retirement. It should also be kept in mind to determine annuities.

    Annuity: Talking of annuities, it must be remembered that an insurance investment plan has to be such that while it provides a sufficient cover to act as a financial cushion in case of an eventuality, it should also be sufficient to be able to generate meaningful annuity after retirement.

    Risk-appetite: How much to invest in an investment-insurance policy is also determined by the amount of risk the policy holder can afford to take. If a person has high tolerance for risks, he can choose a more conventional type of endowment plan which will cost less as such plans invest in the assets market and invest the balance of surplus disposable income in direct equity and mutual funds with a view to earn high returns. Even if a person prefers to confine his investment in one insurance-investment plan, one with higher appetite for risk can choose an aggressive ULIP to maximize returns.

    A word of caution
    It is strongly advised that those looking for aggressive investment-insurance plans must choose one that gradually disinvest from equities and reinvest the same in debts. As maturity approaches, the corpus should be mostly in safe avenues, secure from market volatility.
    What is Unit Linked Insurance Plan (ULIP)
    The Unit Liked Insurance Policy (ULIP), which was first launched by UTI, gained quick popularity among both insurers and investors. ULIPs serve as an integrated financial product that has dual feature of both insurance as well as investment. It is designed in such a manner that a portion of the premium paid is utilized for insurance cover to the policyholder while the rest is invested in various equity and debt schemes. The money thus collected by the insurer is utilized to form a pool of fund that is again invested in various market instruments in varying proportions, just the way mutual funds operate.

    The investments made in ULIPs are managed by fund managers from the insurance company, eliminating the need to track the investments. It allows you to invest in multiple options, ranging from low-risk to high-risk, depending on your risk appetite. ULIPs also allow you to switch between your investments, thereby help to maximise your gains when market conditions are conducive.

    Features and benefits of ULIP
    ULIP comes with unique features that offer a bunch of benefits to the customers. It acts as a financial product that offers return as well as security.

    Below are some highlighting features that makes ULIP comprehensive in nature.

    • Flexibility: The plans can be customised to your need. With the availability of options like choosing life cover, changing premium amount, various riders, and choosing investment avenues in form of stocks or bonds or MFs, ULIP gives ample flexibility to policy buyers.
    • Transparency: When you select your fund investment options at the time of investing in a ULIP, it is clear where your money will be invested, thus doing away with any ambiguity on that front.
    • Liquidity: After a certain lock-in period, customers can make either full or partial withdrawals depending on the schemes availed.
    • Tax benefits: ULIP not only offers protection and returns but also provides tax exemption under section 80C of the IT Act for life insurance and health insurance plans and under section 80D for life insurance and critical illness riders.
    • Risk mitigation: Risk is comparatively lower compared to mutual funds and customers can play safe by making appropriate fund investment options. These are great for investors who wish to avail the advantage of market growth without actually participating in the stock market.
    • Death and Maturity benefits: Death benefit provided is equal to the sum assured plus fund value when you take a double benefit plan. When the policyholder survives beyond the maturity period, maturity benefits in form of fund value (or sum assured, whichever is higher) are offered.

    Types of ULIP
    Basis various parameters, ULIP can be classified into following types.

    Based on funds invested in:
    • Equity Funds
    • Balanced Funds
    • Debt Funds

    Based on end use of funds:
    • Child plan
    • Retirement plan
    • Wealth creation
    • Medical benefit

    Based on death benefits furnished to customers
    • Type I
    • Type II

    ULIP Riders
    Additional coverage benefits can be added in form of a rider to an existing policy to enhance the protection offered. Riders offer coverage over and above the one offered by the policy and are optional add-on’s. They are designed based on the customer’s requirement and need, life-stage, and risk appetite. The various types of riders offered along with ULIPs are as below:

    • Accidental Death or Permanent Disability Benefit Rider: This rider covers the policyholder in any unfortunate event of accidental death. The policyholder’s beneficiaries receive the additional benefit in such situation.
    • Critical Illness Rider: This add-on provides the policyholder with financial assistance in case he or she is diagnosed with a critical illness as defined by the rider.
    • Term Rider: This rider provides the policyholder with a regular monthly income to the beneficiary in the event of the policyholder’s death.
    • Monthly Premium Waiver: This rider offers the policyholder a waiver from premium payment if he or she meets with an unfortunate accident as covered under the rider.

    However, one can ignore ULIP and do separate investments in life insurance and mutual funds and avail good returns, assured protection, and attractive tax savings. But maintaining the right balance between multiple investment products could be slightly difficult. Hence, triple benefits of life cover, high returns, and tax rebates with minimal risk of losses can be addressed only by a ULIP.

    Difference between traditional plans and ULIP policies
    Unit Linked Insurance Policies (ULIPs) and traditional insurance policies are two main stream insurance products, which cater to the larger insurance market. ULIPs, which are relatively newer in the market, are increasing in popularity although the proportion of ULIPs in overall insurance market is still very low as compared to traditional policies.

    While there is fundamental difference in these two products, we will discuss the difference in charges on these two products. This is important because these charges go from your premium and thus impact your returns.

    Brief idea about difference in ULIPs and Traditional policies
    Traditional policies are conservative in nature. They invest almost the entire fund in low risk or risk free securities such as Government bonds, and high-grade corporate bonds. These bonds are called fixed income securities, because they pay a fixed rate of return. Usually the returns are average to low in traditional policies because of their conservative nature.

    ULIPs, on the other hand, are insurance and investment bundled together. A part of the premium goes towards insurance coverage while the remaining part is invested in a mix of equities and debt. The mix offers various options. Some ULIPs have higher proportion of equities than debt; some have higher proportion of debts than equities.

    Charges in ULIPs
    Mortality charges: As explained, ULIPs provide insurance and investment bundled together. Hence, mortality charge is the charge for providing insurance coverage. The rate is calculated after factoring in your age, health risk and mortality table referred by the insurer.

    First year allocation charges and administration charges: This is the major charge in any ULIP scheme and levied during the first year. This includes various charges such as underwriting, agent’s commission, any other costs associated with processing, fund allocation, etc. come under this heading. The premium allocation can be as high as 7.5%.This is the highest charge and charged once.

    Yearly administration charges: The Company charges for administration expenses every month. This is charged for all the administration that goes behind managing your policy.

    Fund management & related charges: As explained, a part of the premium goes towards investment into a mix of equities and debts or mutual funds. Since this requires active management, a fund management fee is charged from investors. This is annual charge and it should not exceed 1.5% as per IRDA guidelines.

    Moreover, ULIPs provide lot of flexibility in scheme selection, changing schemes, partial withdrawal, and premature closure. All these flexibilities come at a cost though and are levied to carry out this transaction. Here are the typical charges on these changes:

    Partial Withdrawal Charges: Differs with vendors. This causes penalty for investors.

    Premature closure of ULIP: No charges after 5 years.However, the charges are a percentage of the value Before 5 years of buying of ULIPs.

    Changing scheme underlying the product: Changing scheme can cost you anywhere between Rs 100 and Rs 500. Switching of schemes can be done at the specified interval. Some vendors do not charge anything for this.

    Overall, IRDA has capped the average annual charge to 2.25% for long term. This regulation has made ULIP a much better product.

    Charges in traditional insurance
    The major expense in traditional insurance is agent’s commission. It can be as high as 35% in the first year for a plan with tenure of 15 years or more. This reduces in the second year and third year t0 7.5%, and 5% for the subsequent years. This is taken as soon as the premium is paid. Hence the money invested is the premium minus the commission.

    There are other charges like mortality charges, but they are not disclosed in the same way as ULIPs. All that is done is that the company pays the sum assured and bonus. The bonus is nothing but the value of your investment after all the charges in managing the policy are deducted.

    Important points
    The illustration that you see in the brochure is given based on your premium. However, in reality, you get the returns on the money invested from your premium after deducting all the charges associated with managing the scheme.

    For example, the table might show 6% return or the premium of Rs 1,00,000 in the first year and shows a figure of 1.06 Lakhs. However, if the agent commission is 25% in the first year, the company invests only Rs. 75,000 in the first year and your final value at the end of the first year at the rate of 6% should be about Rs. 79,000.The same calculation applies in every year.

    Hence look at all the charges before investing. There is a separate section about this in the brochure of the scheme. Please go through it before you put your money.

    What are the types of guaranteed insurance investment policies
    Insurance policies are broadly classified into three categories the world over:

    a) Whole Life Insurance policies
    b) Universal Life Insurance policies, and
    c) Endowment policies

    Of these, the first product is a pure insurance type, while the second and third are a mix of insurance and investment.

    In India, we have a slightly different classification as the products differ in their nature:

    a) Whole Life Insurance policies
    b) Term life insurance policies, and
    c) Endowment policies

    Of these, the first two are pure insurance policies and the third is of insurance-investment type.

    Thing to note: In terms of guaranteed return, even whole life insurance policies pay the corpus against claim, so these can also be considered as guaranteed insurance policies. However, these are not investment plans as they do not guarantee return on investment. For that matter, term life plans can also be called guaranteed policies, in as much as there is a guarantee of financial security for the term.

    In terms of insurance-investment policies, three distinct types of products are offered in India: Endowment Plans, Money Back Plans, and ULIPs.

    1. Endowment Plans: An Endowment plan is a combination of investment and insurance. It provides a life cover to the policy holder for the term chosen. It also shares the profit with the policy holder in the form of bonuses that are accrued and added to the sum assured and paid upon maturity or death whatever the case may be. Thus, it differs from pure insurance plans like term plans in that it guarantees a sum assured in case of death of the policy holder during the term as well as on surviving the term.
      The funds invested in an endowment plan are usually invested, after deducting charges, in a debt-equity mix. The profits, if any, form the non-guaranteed component of maturity payout over and above the sum assured. As endowment plans provide comprehensive coverage in addition to guaranteed returns, the premiums under this type of plan are higher compared to pure insurance plans.
    2. Money Back Plans: These plans are also a kind of endowment plans, but with a slight difference in the mode of payouts. In a money back plan, the policy holder is entitled to periodic payments as part of the sum assured, the balance being paid upon maturity. These plans are also insurance-investment plans as they bundle both life insurance and investment feature.
      The sum assured as well as the money back feature both are guaranteed and exempted form tax. Naturally, these plans offer more liquidity to the policy holder in terms of withdrawal and are ideal for child education, marriage, and pre-identified expenses in life.
    3. ULIPs: Unit Linked Insurance Plans, as the name implies, are insurance plans that invest in units of funds linked to the market. These plans too offer life cover along with investment benefits and are a variant of endowment plans.
      The sum assured under a ULIP plan depends upon the choice of the customer who is free to choose a fund allotment ratio (in equities and debts) as well as the type of funds from a range of qualified investments. The sum assured is a combination of guaranteed and variable component.
      The guaranteed component comes from investment in debt instruments whereas the variable component comes from investment in equity. The performance of funds allocated in equities can be tracked online from present NAV (Net Asset Value). Investment in ULIPs can give huge returns if fund allocation is chosen heavily in favour of equities. Premium of ULIPs are on the higher side as it entails upfront charges like fund allocation charges, mortality charges and administrative charges etc.

    Besides these, some annuities or pension plans also fall under the category of ULIPs.

    Is buying ULIP always risky?
    As a financial product, ULIP (Unit Linked Insurance Plan) did not enjoy the awareness it does now a decade ago. Then, an endowment policy that works just like depositing an amount in a fixed deposit in a bank was popular.

    When ULIP entered the market, the insurance companies faced immense challenges in convincing investors that ULIP was just like any other insurance scheme, with the only difference that the return depends on the equity market. The fund management is done so efficiently that in the long term the ULIP achieves quite attractive returns. Of course, there is huge dependency on market forces.

    So, it is feasible to buy a policy only after knowing the risk factors and benefits elaborately?

    How a ULIP policy works
    While filling up a ULIP form, you will be asked to tick on the funds you want to invest. This is a vital aspect of ULIP, though most of the policy holders may not be aware of the same. The insurance companies, in general, explain the features of those funds and their different levels of risk. As an applicant of insurance policy, you must have clear knowledge on these funds.

    As a whole, three basic aspects of these funds include the following:

    • Risky funds are subject to high market risk, which means they can result in a high returns or high losses.
    • Conservative funds or debt funds like the Government bonds are less riskier but their returns may not be as high as risky funds during good times.
    • Balanced funds ensure investment in risky bonds and conservative bonds in a balanced way.

    There are certain charges that the insurance company will levy on the policy and deduct from the premium like the fund management charge, premium application charge, service charge, mortality charge, education cess, etc.

    In the first year, a lump sum is deducted from the premium amount. However, from the second year onwards, charges reduce drastically. The remaining amount is kept for insurance premium, which is mandatory every year as long as the policy is in force.

    After the deduction of all these charges, the remaining amount is allocated in the funds as per the policy holder’s choice of funds. The fund manager keeps a close eye on the market and fund performance to ensure steady growth of the fund.

    Risks associated with ULIP
    There is a prevailing myth that ULIPs are a risky product to invest your hard-earned money in. However, this is not always so.

    Choose your type: You have the opportunity to choose the level of risk by deciding on funds with different features. If you choose an aggressive fund, then, of course, there is a market risk. Again, there are some conservative funds that entail a very low level of risk. Alternatively, ULIPs also offer balanced funds with minimal risk. The policy holder can change the funds as per the terms and conditions of the policy.

    Go for double benefit plans: Double benefit plans are ULIPs that offer guaranteed sum assured plus fund value, which assures a guaranteed death benefit apart from the fund value at the time of claim.

    Opt for being conservative: In India, ULIPs are quite diverse in profile. You can find some conservative ULIP policies where the minimum return on investment is guaranteed while in some other policies you can find market risk are mitigated through the application of some effective instruments like locking highest NAV in a year or automatic transfer of fund in the highest performing equity, etc.

    Higher returns than normal can definitely be expected through ULIPs. All you need is to be knowledgeable in this sector and a little bit of focus in choosing the right policy and right funds. The equity market in India is registering a steady growth, so you can reap the benefits of the market through ULIPs. So, ULIPs may not always be risky. An important point to remember here is that ULIP plans are suitable for long term investments to get good returns, as the ups and downs of the market get balanced in that case.

    What is NAV?
    NAV or Net Asset Value is an interesting concept, and not least because the rise and fall of NAV makes investors’ moods rise and fall in tandem. NAV is the price investors pay for one unit of a fund or the sum they receive when they sell a unit of the fund. However, do you know that there are many things that work silently in the background to give you that nice number called NAV? Here we discuss NAV and how the number is arrived at.

    Net Asset Value of a fund
    In case of equities, pricing is simply a result of demand-supply matching. The initial price is fixed at the launch of IPO. From then onwards, the price depends on demand and supply in the market. The demand and supply again depends on various factors including macro-economic ones and company specific ones.

    Funds are different. They invest in a set of assets involving equities and debts. So it has to proportionately factor in the price of individual assets underlying the fund.

    Price of underlying securities: This is the market price of all underlying securities forming the portfolio of the fund. The sum of their weighted prices is what forms the market value of the fund. The market price of securities and debts are the closing price at the end of the day. Hence, while prices of equities change during the day many times, the closing price at the end of the day is taken to update the price of the fund.

    Incomes accrued from operation: Any dividends, income etc. are part of the other income, which is added.

    The sum of these two give total asset of the fund.

    In addition, there are other drivers of the NAV. Since the company floating the security also has liabilities and expenses, these must be deducted. They involve the following:

    Debts: The Company may have taken debts to invest in funds. These are liabilities on the balance sheet of the company. Hence, they reduce the asset value.

    Expenses: Expenses in managing the fund, administration expenses, and any other expenses are to be subtracted from the asset value of the fund.

    The net asset value is nothing but the difference between the asset and liabilities. This is the net asset value of the whole fund.

    Each fund is divided into units. These units comprise the lowest indivisible fraction of the portfolio. This is what we buy when we invest in funds. Dividing the net asset by the number of units in the fund is net asset value or NAV. NAV is price of one unit of the fund.

    Important points on NAV
    NAV can be different for the same fund in different variants. For example, suppose a fund Magna has two variants—growth and dividend. The first variant doesn’t pay any dividend while the second pays dividend whenever it is declared by the companies underlying the fund.

    The NAV of the growth fund will always be higher than the NAV of the dividend fund because dividend is subtracted from the NAV. This is why you see the difference in NAV of the two variants of the same fund. In case of growth fund, since there is no dividend, the NAV maintains its value. However, this doesn’t mean that one variant is better than the other. The selection should depend on your requirement. If you need regular dividend to enhance your income, go for dividend option of the fund. If you are looking for long term wealth building, go for growth option.

    What are various fund options which insurance companies offer for invesment
    Insurance companies offer many investment plans for different objectives such as pension plans, child plans, ULIPs, general insurance plans, etc. In all such plans, returns play the most important part and depend on the assets underlying the schemes. The assets underlying the scheme can be equities, debts, or mutual funds which invest in these assets. In most of the cases, these schemes invest in mutual funds with varying degree of equities and debt proportions. This drives the major difference in risks and returns of any investment plan. In this article, we will discuss the various fund options that insurance companies offer for investment under their products.

    Conservative funds (or debt funds)
    An Endowment plan is a low risk investment. This is one of the most popular products offered by insurance companies and has been there for long. Endowment plans invest in Government securities or debt funds, which is an indirect way to invest in low risk assets. The debt funds finally invest in Government securities or high grade corporate bonds. This ensures that investors do not lose money because of market fluctuations. The key here is the protection of investment. Hence, endowment plans provide average to low returns but ensure that your investment doesn’t become a function of the market’s whims.

    Debt funds are not only used in endowment plan, but also in other plans such as child plans, pension plans, and ULIPs. Since these plans offer various fund options, debt funds are one of the options where the risk is low.

    Balanced funds (Equity and Debt)
    As the name implies, balanced funds invest in a mix of equities and debts. Equities are risky because their returns depend on the performance of the underlying companies. Debts or Bonds are considered safer because they promise a fixed rate of return. Hence, balanced funds are useful for investors who do not like to take undue risk in the market for their entire investment but also do not want to completely forego it.

    Balanced funds are riskier than the debt funds mentioned above but less riskier than equity-oriented mutual funds. The presence of debts in the balanced funds provides much needed stability in returns while presence of equities ensures that any rally in the market helps the fund get higher returns.

    Equity funds
    As far as risk and reward are concerned, equity funds involve both of them to a high degree. The degree of risk is higher because there is no fixed income promised. Moreover, market movements impact the funds directly. Despite the risks associated with equity investment, equities have known to surpass returns of every other asset in the long run.

    Since the return depends on the performance of the underlying companies’ stocks as well as the market, there are too many factors which are beyond anyone’s control.

    For example, the risks can be macro-economic risks, which are beyond the company’s ability to handle. War, Government policies, world trade wars such as banning import/export politics etc. can make or break a stock despite companies’ strong fundamentals. This is apart from the business risks which companies always face in the form of competition.

    Since equity-based mutual funds are riskier, it is suitable for investors who have high-risk appetite and longer investment horizon. Market fluctuations can test patience of even seasoned investors. There are instances when markets can remain subdued for extended period of time, which impacts the returns of equity mutual funds.

      Invests in Types of plans Risk Suitable for
    Conservative funds (or debt funds) Debts funds (Government securities or high grade corporate bonds) Traditional endowment plans low risk, low returns conservative investors, middle aged investors who weigh security over gains
    Balanced funds a mix of equities and debts child plans, pension plans, and ULIPs medium risk, medium returns those who look for decent returns in medium to long term and with low risk appetite
    Equity funds Equity funds Equity ULIPs High risk high returns youngsters with long term investment prospects and high risk appetite

    Important points for investors
    • Investors should analyse their risk appetite before selecting investment plans and the associated funds. For example, child plans can come in 2 variants, namely endowment plan and ULIP-based. In case of ULIP-based, the investors can select the fund underlying ULIP on the basis of proportion of equities and debts.
    • Most of the investment plans offer investors the ability to switch over to a different fund from time to time. If you have erred by choosing a wrong fund, you can switch over to any other fund. For example, you may find that equities are too risky but you have selected an equity oriented mutual fund. You can switch to a balanced fund or debt funds at the next opportunity.

    Consider the above tips before deciding to buy an investment plan. It will save you from unnecessary expenses and headaches in future.

    What is the tax benefit of buying Investment insurance plan
    When it comes to the end of the financial year, the number of people opting to invest in many of the insurance cum investment offerings inevitably goes up. The tax benefits of investing in insurance cum investment plans become merely an “additional incentive” for investors in their last minute rush for investments in such offerings.

    The tax benefits and tax advantages of insurance and investment plans can be quite substantial and should be planned for proactively instead of as an additional incentive. These benefits are as outlined below.

    Tax benefits on premium payment: The premium paid for an investment cum insurance plan qualifies for tax deductions under Section 80C of the Income Tax Act. The maximum amount that can be availed as tax deduction is however limited to Rs. 1,50,000 as per the current taxation regulations. For policies issued after April 1, 2012, the maximum limit has been stipulated at 10% of Sum Assured as maximum permissible tax deductible limit. For policyholders opting for life insurance plans and suffering from disability or disease as specified under Section 80U and 80DDB, the maximum permissible limit is fixed at 15% of the Sum Assured.

    Tax-free death benefits: Any death benefits received by the policyholder’s nominee for investment in any insurance cum investment policy are tax-free as per Section 10 (10D) of the Income Tax Act. In the event of the premium payable exceeding the 10% of Sum Assured limit (15% for disabled), the whole proceeds from the insurance are taxable in the year of receipt.

    Taxation and survival benefits: Any money received from the life insurer is subject to a 2% TDS (Tax Deducted at Source) as per Section 194DA of the Income Tax Act if no exemption is valid under Section 10(10D). In the event of early surrender in a Unit Linked Insurance Plan (ULIP) before the mandatory premium payment term of 5 years, the aggregated amount of tax deduction allowed in earlier years would be discontinued with a reversal of tax benefits.

    Tax benefits of investment cum insurance plans at a glance
    • Premium paid for an investment cum insurance plan qualifies for tax deductions under Section 80c of the Income Tax Act.
    • For policies issued after April 1, 2012, the maximum limit has been stipulated at 10% of Sum Assured as maximum permissible tax deductible limit.
    • Policyholders suffering from disability or disease can avail tax benefits to the tune of 15% of the Sum Assured.
    • Death benefits of insurance cum investment offerings are tax free as per Section 10 (10D) of the Income Tax Act.

    Important terminologies of Investment plan
    The next time when you hear a rags-to-riches story, do not curse your luck or envy the other person. Most of the successful financial life stories have their beginnings in humble, but wise and timely investment decisions. Equally, choosing to invest wrongly can have disastrous consequences and can mean a financial loss that can take a long time to rebuild the lost corpus. Investment does not mean putting in your money in just about any or every financial instrument. Investment must be planned to ensure you are able to attain your short, medium and long term financial goals.

    Savings is not the same as investment
    Many people assume investment to be the same as savings.

    From a monthly income of Rs. 50,000, if Mr. A is saving Rs. 15,000 every month and parking the money in his savings bank, he may actually be losing money in the long run. Although the bank may offer a small interest to the tune of 4% on savings, if the inflation rises more than the interest rate, he would be losing the purchasing value of the parked funds.

    Savings is essential to ensure there is enough liquidity for a cash crunch or an emergency situation. The money that you have left post savings must be utilized towards your investment needs. Knowing how much to save and how much to invest will depend on your income, the number of financial dependants, and your medium and long term investment goals.

    Investment planning and wealth management
    Investment needs to be well planned to be able to generate the maximum possible returns. For example, if you are opting for an insurance cum investment plan, taking a ULIP early in life can help you maximize your earning potential by allocating a large quantum to the equity funds. Taking the same plan 10 years later in life will mean you opt for a more balanced approach of debt and equity that may not be able to offer higher returns as in the first case.

    Plan your own investments
    Investments should always be personalized and should not mimic what your family, friends, or neighbor have invested in. Everyone has unique goals and unique needs. Make sure your investments are done as per your financial needs and not what others randomly advise.

    Seeking sound financial advice an essential for investment planning
    When in doubt, seek the services of an approved financial advisor. This way, you can get direction and insight into the best possible investment options to ensure you are able to address your financial needs for a better future.

    Investment planning tips at a glance
    • Savings and investment are two different aspects and should not be taken as a common goal.
    • Investments should only start post savings to ensure there is enough saving component for a rainy day.
    • No two individuals can ideally have a same financial plan so always follow a plan as per your needs.
    • Seek the services of a financial advisor to ensure adequate investment options are availed.
    • Do not put all eggs in one basket; diversify the financial investments.
    • Keep an eye on the taxation benefits and choose investments aptly.
    • Have both medium and long term goals for apt investment.

    What is Systematic Partial withdrawl (SPW) in ULIP policies
    In the context of mutual funds, most investors are aware of the Systematic Investment Plan (i.e. SIP) and Systematic Withdrawal Plan (i.e. SWP). SWP is nothing but periodic selling of a fixed amount worth of mutual funds. The proceeds are credited to the investors’ account. It is an effective way to manage the risk, which may occur if you go for complete redemption. In case of complete redemption, you may miss any potential market rally that may happen in future. SWP allows you to not only redeem a fixed amount to serve your need of money, but also take advantage of any potential market upside. However, very few investors know about similar facility in ULIPs.

    Here, we outline the SWP feature in ULIPs.

    Partial withdrawals in ULIPs
    ULIPs allow partial withdrawal after a certain number of years—usually 5 years from the start of the scheme. Then the investor can withdraw 20% of the fund value. You can withdraw as many times in a year as long as the sum of all withdrawals doesn’t exceed 20% of the value of the fund in a year.

    For example, suppose your ULIP’s fund value in a given year is 3,00,000. You have been investing in this plan for more than 5 years. Hence, you are eligible for partial withdrawal. Your maximum withdrawal limit for the current year is 20% of 3 Lakhs, i.e. Rs. 60,000.

    In the Systematic Partial Withdrawal, you can withdraw a certain amount periodically. For example, you can choose to withdraw a fixed amount every month or every three months. The only condition is that the amount of withdrawals should not exceed 20% of the fund value in a year.

    Partial withdrawal is under the condition that at any given point in time, the fund balance should not go below 125% of the annual premium if it a regular premium plan or 50% of the premium under the single premium plan. Partial withdrawal incurs a fixed charge from investors.

    Important points for investors before opting for SWP in ULIPs
    Partial withdrawal is usually not advisable for ULIPs. ULIPs are Unit Linked Insurance Plans, which are market-linked. Any market securities, especially equities, can give good returns in the long run. There are many factors affecting the returns in short term. Hence, it is advisable to go for long term investment in ULIPs.

    Allow balancing of short term fluctuations: In the long run, all short term fluctuations will be balanced in an investment. When you withdraw from ULIPs, the withdrawal amount will not be able to take advantage of the compounding. Try to arrange money from other sources such as your bank deposit, family and friends, or any other sources than from your ULIP. However, there are genuine cases when you may need to withdraw for emergency purposes.

    Regular stream of money during retirement: Then there are cases where retired investors may need regular stream of money for day-to-day expenses. Systematic partial withdrawal helps in such situations.

    All withdrawals are not free of charge: Many insurance companies give a certain number of withdrawals for free, i.e. without any charge in a year. So look at this option before signing for systematic partial withdrawal. There are few companies, which do not put any limit on number of withdrawals.

    Finally, suppose there is a genuine necessity and you have activated systematic partial withdrawal, but later if you don’t need it anymore, you can stop it. If you want to put back extra money, you can use top-up premium feature to put the money back. This is apart from the premium that you pay. This will bring your fund value to the previous level.

    What if market falls at the time of maturity? Will my returns/corpus go for a toss?
    Have you ever wondered what would have happened to the investors in 2008 when the market crashed? Did it impact all investors uniformly? Or did it spare some and affected a few? How exactly does a market fall impact our investment and fund value? Let us look at this aspect of investing. What if the market falls the moment the maturity of our investment is about to complete?

    Assets underlying the investment plan
    The impact of a market fall depends on the types of assets underlying your investment plan. Most investment plans invest in mutual funds. Mutual funds can be categorized by various ways such as based on market capitalization, sector, equity exposure, commodities, region, and countries.

    But broadly, they are divided based on risk exposure, which means exposure to equity. Let’s look at these types before we assess the impact of market fall in these securities.

    Equity-based mutual funds: Equity-based mutual funds invest major part of their fund in equities. Since equities are risky by their nature, equity-based mutual funds are highly prone to market fluctuations. The risk is because of both macroeconomic factors such as Government policies, change in business sentiments, economic growth, taxation policies, trade wars etc. and also company-related factors. The macro-economic factors are also known as market risk because these factors take the whole market down or up depending on the nature of events.

    Debt-oriented mutual funds: Debt-based mutual funds invest in bonds, which are mainly Government securities, and corporate bonds. Bonds are also called fixed income securities because they provide a fixed rate of return. Hence, these mutual funds are low risk with low to average returns. Government securities pose no default risk. Corporate bonds do induce some risk factor but high grade corporate bonds offered by blue chip companies are as good as Government securities.

    Balanced funds: Balanced funds invest in a mix of equities and bonds (debt). Since their exposure to equity is lesser than that of equity-based mutual fund, the risk is also lower. The rest is invested in bonds. Bonds provide stability to your investment as they give a fixed return.

    Impact of market fall in your investment
    The effect of movement of market on our investment depends on the exposure to the market, in this case, exposure to the equity. Hence, any investment plan with an underlying scheme that is equity-based will face a higher impact of market fall than those invested in balanced funds or debt funds.

    The impact of market fall on ULIPs
    Now, take an example. Suppose you have invested in a double benefit ULIP paying Rs 1 Lakhs per year for 10 years’ tenure. The ULIP is investing in a scheme that invests about 80% in equities while only 20% is invested in debt. Essentially, the underlying asset is equity-based. Assume that the sum assured is 5 Lakhs.

    As you approach your plan’s maturity, the market is at its peak and the fund value has gone to about 12 Lakhs. This value is 10 Lakhs owing to the equity part while debt has gone up to 2 Lakhs. So if you redeem it now, you get about 17 Lakhs minus few nominal charges, if any. Now suppose, there is market crash because of the failure of a big bank. The market comes down heavily in one day and slowly keeps falling. So by the time your maturity comes to a close, the market has crashed by 40%. This means the equity value will go down by 40%. Hence the value of the equity portion of the fund will come down to 6 Lakhs. The debt part will not be impacted.

    The new fund value post market fall is 8 Lakhs (6 Lakhs + 2 Lakhs). The sum assured too will not be impacted. This means you will receive 13 Lakhs at the end of the maturity. Now imagine a case where the underlying asset is a set of bonds by Government and blue chip companies. The impact will be nil to very low.

    Hence, the impact of a market fall on your investment is directly proportional to its exposure to equity. Higher the exposure, higher the impact.

    Note: The example given is a simple one by design. We have ignored transaction costs and assumed the correlation between the equities underlying the scheme with the market is 1, which means the equity portion moves in tandem with the market. In some cases, this may not be entirely true. Even if we assume that the fall in equity portion is 30% because of 40% market fall, the value will still come down by 3 Lakhs and your total receivable will be 14 Lakhs. However, if the equity portion falls by 50%, your receivable will be 12 Lakhs.

    Benefits of Whole life insurance plans
    One thing common with most life insurance plans is that they come with an expiry date. The cost of life insurance rises with each passing year as the policyholder gets older. Should you be one of those seeking a life insurance policy that is permanently active, the option of a whole life insurance plan is apt for your needs.

    As the name suggest, a whole life insurance plan remains active throughout the whole lifetime of the policyholder. The maturity age is fixed at 100 years for such a policy offering wholesome protection.

    Whole life insurance plans offer multiple benefits apart from the permanent protective cover on offer. If you as a policyholder live past the maturity age, the whole life insurance policy becomes a matured endowment plan. What's more the death benefits on offer under a whole life insurance plan are tax free.

    Here is a look at the essential benefits of a whole life insurance plan.

    Benefits and features of whole life insurance plans
    Whole life insurance plans or permanent life insurance plan come at a higher premium costs than Investment Plans but with additional offerings, lifetime coverage and other essential benefits they can be a worthwhile investment if you need protection for entire life.

    Cover and protection for life: The biggest benefit of opting for a whole life insurance plan is the coverage for life option. Unlike other insurance types which offer protection for a prefixed number of years, whole life plans offer a cover for the entire life. If the policyholder expires before the maturity age of 100 years, the nominee gets a lump sum maturity amount which is tax free, Outliving the maturity term will not offer any payouts but an extensive protection component till 100 years of age.

    For example, let us take the case of Amit, a 30 year old freelance photojournalist. Being involved in a high risk job of covering news and on field journalism related activities; Amit opted for a whole life insurance with a premium paying term of 20 years. By the time Amit turns 50 his whole life insurance plan will offer a lump sum payout that he can use for his financial needs like retirement planning etc. The protection cover for Amit will continue till the maturity age of the policy which is 100 years.

    Options to customize the policy: While life insurance plans offer the policyholder to customize the policy by choosing coverage and premium as per their needs. From a pure whole life insurance where premiums are paid throughout life to limited premium paying whole life plans or a lump sum one time premium payment plans, there are multiple options for each policyholder. The policyholder also has the freedom to move funds between insurance and savings components of the policy.

    Guaranteed Sum Assured and taxation benefits: Whole life insurance policies offer a guaranteed sum assured along with bonuses as declared based on the performances of the funds for a unit linked investment component of the policy. All whole life insurance plans offer tax benefits for premiums paid under Section 80C and Section 10(10D) of the Income Tax Act, 1961.

    Liquidity benefits and loan option on whole life term plan: Whole life insurance plans offer cash payout at the term of the premium term making them helpful for liquidity goals. A loan can be easily sought on the whole life policy in case of a financial crunch.

    Tax free death benefits: Whole life insurance plans not only offer a complete protection for a lifetime but will also help nominees of the policyholder. Being a long term investment component whole life insurance plans offer higher returns as death benefits. The lump sum payout made at the death of the policyholder are tax free and can be used as a good investment corpus for the nominee for their financial needs.

    Benefits of Money back plans
    Money back insurance plans offer the triple benefits of insurance protection along with maturity benefits and survival benefits. As an endowment plan, money back insurance plans pay out a prefixed sum as percentage of the sum assured during various stages of the policy.

    So if you are someone looking for guaranteed returns from your insurance investment along with a protection component, a money back plan ideally fits your needs. The regular payouts known as survival benefits are however paid out only if the insured is alive. In the event of death of the policyholder, the survival benefits do not accrue and the nominees receive the maturity amount along with any bonuses if applicable just like a normal life insurance policy.

    Understanding Money Back Plans
    The best way to understand the benefits and advantages of a money back insurance plan is by following the illustrative example of Mohan, a 30 year old sales executive.

    Being the sole breadwinner of the family and with a small child, Mohan wanted both life insurance along with a plan that offer periodic payouts to ensure liquidity needs are met. Mohan opted for a money back life insurance plan offering a Sum Assured of Rs. 10 Lakhs with a policy term of 25 years.

    As per Mohan's opted money back plan, he would be getting 15% of the Sum Assured at regular intervals after the 5th, 10th, 15th and 20th year of the policy and the remaining at maturity.

    Let’s assume Mohan’s child is 10 years old when he gets the first maturity benefit of 15% of the Sum Assured along with any bonus if applicable. The money can be used towards catering for the school expenses of the child.

    The second maturity benefit is paid at 10Th policy year while the 3rd is paid at 15Th year. By the time Mohan’s child would be 20 years old and the money can be used towards higher education needs of the child.

    So effectively after the 20 year period Mohan would have received 60% of the Sum assured of his money back plan. The remaining 40% is used as a protective component for life insurance and is paid at maturity.

    Advantages and features of money back insurance plans
    Assured returns: Being a non-market linked plan, money back insurance plans are able to offer assured returns. This makes such plans ideal for people having a zero or low risk profile seeking guaranteed returns from their insurance investments.

    Regular income flow: Money back plans payout a part of sum assured every few years. This makes for a regular flow of income to cater for any immediate financial needs or ride any liquidity crunch.

    Maturity income: Money back insurance plans with all their regular benefits offer an assured maturity benefit to the policyholder making them an apt protective instrument. Some money back plans come with as low as Rs. 50,000 as maturity benefit making it pocket friendly for all sections of society irrespective of their financial earnings.

    Death benefits: In the event of death, a money back plan offers death benefits just like any other insurance plan with a lump sum payout along with accrued bonuses to the nominee.

    Benefits and advantages of money back insurance plan at a glance
    • Money back insurance plans offer a three in one benefit of insurance protection, maturity benefits as well as survival benefits.
    • Money back plans offer guaranteed returns active through the plan tenure.
    • Money back plans offer both revisionary and additional bonus.
    • Money insurance plans offer regular payouts during the policy term helping with liquidity.
    • Money back insurance plans offer multiple riders to make the investment more comprehensive and all round protection with monetary payout benefits.
    • The annual premium provided it is less than 10% of the sum assured paid for a money back plan qualify for tax deductions under Section 80C of the IT Act.

    Benefits of Endowment Insurance Plans
    For those looking for insurance protection along with an investment advantage which is low risk and offers assured returns, an endowment insurance plan is tailor made. Endowment plans allocate some part of the premium towards sum assured while the remaining part is allocated for investment in various low risk financial instruments.

    Endowment plans pays out a lump sum benefit on maturity to the policyholder or to the nominee in the event of death of the policyholder as a death benefit. Bonuses are also declared periodically enhancing the financial corpus on maturity and death.

    Core advantages and features of money back insurance plans
    Endowment plans are savings oriented insurance plans offering a pre determined amount to the policyholder at maturity. If you are unable to save money or are an impulsive spender, opting for an endowment insurance plan can serve the dual benefits of protection and adequate savings component as long term savings tools.

    Understanding the advantage of endowment insurance plan
    A good way to understand the benefits and advantages of a money back insurance plan is by following the illustrative example of Ravi, a 35 year old working professional looking to save some funds for future needs of his family.

    Let us assume he opts for an endowment plan with a policy term of 25 years and a premium payment term same as the policy term. Assuming Ravi opts for an annual more of premium for a fixed Su Assured of Rs. 1, 00,000 the annual premium comes out to be Rs. 3727.
    Total sum assured paid after the policy term in this case would be Rs. 1, 69, 500 after 25 years plus any additional bonuses.

    If the policyholder dies during the policy tenure the nominee is entitled to get sum assured or the accumulation amount minus any outstanding premiums. The endowment plans offer both reversionary and terminal bonuses although the bonus component of endowment plans are not guaranteed.

    Benefits and advantages of endowment insurance plans at a glance
    • Endowment plans offer a dual benefit of insurance protection along with long term investment for the policyholder.
    • Endowment plans are low risk and safe investments compared to other insurance plans like ULIPS.
    • Endowment plans come with an assured bonuses paid a percentage of sum assured.
    • The returns offered by endowment plans are calculated on a compounding basis making them an apt investment option
    • Endowment plans offer tax benefits with deductions under Section 80C of the IT Act and tax free death benefits under Section 10D.
    • Endowment plans come with additional riders making the insurance more comprehensive by paying a marginally higher premium.
    • Endowment plans are highly liquid and can be liquidated in the event of a financial crunch.

    Benefits of Unit Linked Insurance Plans (ULIPs)
    ULIPs or Unit Linked Insurance Plans are offer dual advantages of insurance protection along with choice of investment offering good returns. Part of the premium paid is used as a life cover protection while the other part is used for due investments in various market linked instruments. ULIPs invest in both equity and debt funds making them a very balanced investment option allowing for market linked returns.

    Unlike the general perception that ULIPs are good only for a high risk investor, a unit linked insurance plan policyholder has the choice of selecting the funds in which the ULIPs will invest as per their risk taking ability. With the changing financial needs and risk factors, a policyholder can keep on changing the investments between various funds to make for an apt financial product.

    Advantages and features of unit linked insurance plans
    Choice of investment funds: Insurers offer multiple fund options for the policyholder to choose from. You can make use of such options to choose the most appropriate fund option with its equity and debt investment ratio as per your financial risk taking capabilities.

    Advantage of professional fund managers: With a ULIP you are making use of the experience of a fund manager should you choose to auto allocate your investments.

    Ability to keep tab on investments: Not only can you choose the funds your ULIP plan will be investing in, you can also keep a track on the investments and net asset value of your insurance. This gives you a proactive insight into the returns being generated by your Unit Linked Plan.

    Lock in period: The minimum lock-in period for ULIPs is five years with no guaranteed returns.

    Partial withdrawal facility: You can make use of a partial withdrawal facility allowing for a lump sum withdrawal after five years of investment in a unit linked plan.

    Flexibility to invest higher amounts: with ULIPs you can also choose to invest an additional amount of money over and above your premium amount enhancing your overall sum assured.

    Tax benefits: ULIP investments are eligible for tax deduction under Section 80C provided the premium paid is less than 10% of the sum assured. Death benefits paid under ULIPs are also tax free.

    Difference between ULIPs and endowment plans
    Unit linked insurance plans and endowment plans may appear to be similar in nature but have some basic differences. Endowment plans offering guaranteed returns and it is for this reason that they invest in secured debt instruments. ULIPs on the other hand give the policyholder the flexibility to choose between various funds with diverse equity to debt ratio as per their risk taking ability.

    With a ULIP plan the final returns may be higher or lower than an endowment plan depending on the market parameters. An endowment plan however offered lower but assured returns ranging from 4 to 8% on an average.

    Benefits and advantages of unit linked insurance plans at a glance
    • ULIPs offer the dual benefit of investment and insurance cover with market linked returns adding an extra element with substantial returns over a long term.
    • ULIPS allow for investment in equity market funds managed by experienced fund managers and insurance company advisors.
    • One can easily keep a tab on the returns generated and the net asset value or NAV of the ULIP plan.
    • ULIPs offer multiple fund options to choose from including various percentages of equity and debt investments to cater for financial needs of all individuals.
    • ULIPs offer partial withdrawal facility to cater for any immediate or sudden financial needs.
    • ULIPs have a lower surrender charges should one choose to surrender a policy completely.
    • ULIPs are a high risk-high return financial instrument

    Is loan facility available against investment insurance policy?
    A financial crunch can happen to just about anyone and seeking a loan may sometimes be unavoidable. Unfortunately when it comes to seeking a loan the first preference amongst large number of people continues to be a personal loan or various loan schemes offered by banks.

    What most people overlook is their life insurance policy, which can double up as a loan offering while retaining its investment and protection offerings.

    Loan against insurance: An overview on eligible insurance types
    Before you get ready to opt for a loan against your life insurance plan, it is essential to know if your policy qualifies for such an option. Loan is only offered on the surrender value of a life insurance plan.

    For example, term insurance that offers no maturity benefits are not eligible for any loans. Similarly you cannot avail loans against Unit Linked Insurance Plans or ULIPs as the maturity component is market dependant and not fixed.

    Is your ULIP eligible for loan again insurance?
    If you have a ULIP is from before 2009, you may get a loan option against your unit linked insurance plan, if it satisfies the below conditions:

    • Only those insurance plans with a surrender value are eligible for life insurance.
    • You cannot avail life insurance on term plans and ULIPs.
    • Pre 2009 ULIPs may qualify for loans with insurers offering up to 50% of the current fund value as loan amount.
    • All other insurance plans like endowment plans, money back plans and whole life insurance plans are eligible for loans.
    • Irrespective of the type of eligible policy, you are eligible to seek loan only against Insurance if as a policyholder you have been paying the premium for atleats three years.

    Loan amount when seeking insurance:
    The amount of money you can avail as a loan against your life insurance varies on the surrender value of your policy and the number of premiums paid. On an average, one can seek 70 to 90% of the surrender value of the life insurance as a loan.

    For example, if a policyholder has an eligible life insurance plan with a cover amount of Rs. 10 Lakhs with a surrender value of Rs. 3 Lakhs, you can expect to seek a loan varying between Rs. 2.4 to Rs 2.7 Lakhs.

    Some life insurers also calculate the maximum loan amount as a fixed percentage of the premiums paid by the policyholder. For example If a policyholder has a life insurance policy of Rs. 10 Lakhs if the policyholder has paid premiums of Rs. 7 Lakhs, the insurer can opt a maximum of 50% of the premium paid amount which comes to Rs. 3.5 Lakhs as loan amount.

    Important things to know when seeking loan against life insurance
    • Check with your insurer about the loan option on offer which is listed in the terms and conditions of the policy document.
    • Loans can be availed only with life insurance plans having a surrender value.
    • The maximum loan amount is calculated by the insurer either as percent of premium paid or percent of surrender value.

    How one should do a fund planning before making an investment
    Investing without fund planning is even worse than gambling. A well planned investment is one that takes into account the goals and a timeframe to achieve those goals. Frequently, this includes answering the why’s, where’s, what’s, when’s, and how’s of investment as well as of your objectives. This planning is imperative as you don’t want to rely on hunches and gut feelings but a on a solid strategy that could lead to achievement of your goals.

    So, how does one do a good fund planning?

    Ask yourself these questions.

    What are my goals?
    This is the most important question to ask at the outset. Do you have insurance in your mind? Do you want to invest for a comfortable retirement or do you want to plan your child education?

    The investment strategy will have to be fine-tuned to your goals. If you have multiple goals, you can save much by planning. For example, someone looking for a child education plan can opt for accident and critical illness riders for a very small addition to the premium, thus eliminating the need to buy separate plans.

    How soon would I need funds?
    An efficient planning ensures timely delivery of funds when required. If you want to invest for an emergency, you don’t want to put your funds in an investment that has a long lock-in period. If you want to invest for your retirement, you can afford a long lock-in period.

    For example, you can invest in gold for building an emergency fund, as Gold has impeccable liquidity. On the other hand, you can earn higher returns by investing in direct equities or mutual funds. Because if you are planning long-term, as investment in stocks requires tolerance and time to deliver up to its potential.

    How much should I invest?
    Once you have answered the above questions, you need to consider how much from your disposal income should you invest. Ideally, there should be a cap on 20% of your monthly income for young salaried people who have just started their career and may not have any significant savings.

    People in their 40s and 50s can afford to invest a larger proportion. They might even need to invest more if they are just starting. For example, a 25-year-old person can build a corpus to the tune of 2 crore at 60 years with as little as Rs. 5000 investment per month. To build half of the same corpus, a 40-year-old would need around Rs.15,000 per month.

    Where to invest?
    Who doesn’t want a tip on where to invest? This million-dollar question can be answered with an element of guarantee provided some broad guidelines are adhered to.

    • If you are happy with a return of around 8-10% annually, compounded, you have options that are almost guaranteed. G-Secs, T-bills, Company Fixed Deposits, Bonds, and PPF can help you earn that much without undue risk.
    • If you are eyeing a return in the range of 15-20%, you have to have an appetite for risk. Direct equities and Mutual funds can deliver in that range provided you give your funds ample playtime.
    • For intermediate returns, there are a host of investment-cum-insurance plans which can provide a return in the range of 10-13% with life cover as a bonus, e.g. most ULIPs.

    How to allocate funds?
    This is a wide open field and subject to much debate.

    Fund allocation in investment presumes that investors will not invest entirely in one instrument. A diverse investment portfolio is found to be more secure and yielding higher returns. And yes, it is very much advisable.

    Broadly, funds are allocated among two kind of instruments—debt and equity. You can invest in the ratio of 50:50 or tilt your allocation to either side depending upon your tolerance and age. A young person with great tolerance for risk may choose to invest more in equity as he has a long time horizon to invest, and take it easy from there. That is to say, decrease equity exposure gradually to reach zero risk at the time of maturity.

    These are the broad questions one would like answered before making an investment. There will, no doubt, be other things to consider as individual situations vary. It may be a wise thing to hire the services of a certified financial planner who can review individual situation and advise accordingly.

    Which is more beneficial for investment between ULIP and Mutual Fund
    While both ULIPs and Mutual funds are market-linked, there are differences in how they operate and what features they provide. Which is more beneficial depends on your need as an investor or insurance seeker.

    We look at some of the features of both to help you decide which one to go for based on your specific financial needs.

    ULIPs are insurance cum investment products. They provide not only insurance, but also invest for long term wealth building. This is done by divesting a part of the premium for insurance coverage and the remaining part into investing. Investing can be in equities, debts, or a mix of the two via direct investment or through mutual funds.

    Mutual funds do the same except that they do not provide insurance. Now here are some of the important features that make them differentiate them from each other. Knowing the difference will help investors decide which product is better for investment for him or her.

    ULIPs provide sum assured while mutual funds do not
    Since ULIPs provide insurance too, there is provision for sum assured in ULIP. Mutual funds are pure investment vehicles and hence they do not promise any sum assured. So the choice is about your need.

    Do you need protection as well as investment? If the answer is yes, go for ULIP. Can you get similar benefits by doing the same that ULIPs do with your premium, i.e. putting a part in insurance and the remaining in investment? Certainly, yes. Buy a term insurance and invest in a mutual fund separately to achieve the same result.

    ULIPs have slightly higher charges than Mutual funds
    Since ULIPs provide both the services, i.e. insurance and investment, their charges are a little higher. Earlier, there used to be a huge difference in the charges between mutual funds and ULIPs, but the difference has come down drastically after IRDA capped the ULIP charges to 2.25% for the long term. In the short term, the charges can be as high as 4%. This is still much lower than almost 30% commission that was the norm few years before.

    Mutual funds too have been capped at 2.25% charges. However, mutual funds offer a variety of options where charges can be even less than this. For example, index funds which track sensex, nifty, or any sectoral indices charge about 1% to 1.5% for their annual expense ratio.

    Mutual funds are riskier than ULIPs
    Mutual funds are subject to market risk and so are ULIPs. However, the presence of sum assured component in ULIPs make it less riskier than mutual funds. No matter how low market goes, your ULIP assures you a minimum sum in the form of sum assured.

    This is important from investors’ perspective as risk is a big factor in investment decisions.

    Mutual funds offer more varieties than ULIPs
    From purely investment perspective, mutual funds offer a plethora of schemes based on market capitalization, sectors, risks, regions, commodities and indices. The number of options can be overwhelming. But with a little guidance and care, mutual fund selection can be extremely rewarding.

    Mutual funds, which are based on equities and commodities, can be risky while funds based on bonds have little to no risk. Funds that invest in part equity part debt can be somewhere in the middle, i.e. the presence of equities allows investors to take advantage of the market upsides and the presence of debts makes it more stable in returns.

    Hence, investors who can select their own fund and have some idea about mutual funds, their various types, risks, and their operation can choose mutual funds. For insurance, they should take term insurance or any other that fits their requirement.

    ULIPs may provide more flexibility than mutual funds
    ULIPs allow you to change the scheme under the same product. For example, say you chose a scheme that mainly invests in bonds. However, you anticipate a bull market and you want to take advantage of it. You can change the scheme in your ULIP to a product that invests major part in equities. In case of mutual funds, you have to sell the existing one and buy the one that you want to invest in.

    Conclusion
    Finally, there are other features such as lock-in period, taxation, partial withdrawal, and premature closure in ULIPs, which are not available in mutual funds. In case of mutual funds, you can withdraw the money as and when you need it. At the end of the day, these are just products made to satisfy investors’ needs. Look at your needs first and then decide what should be your investment choice. The above mentioned points will help you make the decision.

    Difference of charges in ULIP and traditional policies
    Unit Linked Insurance Policies (ULIPs) and traditional insurance policies are two main stream insurance products, which cater to the larger insurance market. ULIPs, which are relatively newer in the market, are increasing in popularity although the proportion of ULIPs in overall insurance market is still very low as compared to traditional policies.

    While there is fundamental difference in these two products, we will discuss the difference in charges on these two products. This is important because these charges go from your premium and thus impact your returns.

    Brief idea about difference in ULIPs and Traditional policies
    Traditional policies are conservative in nature. They invest almost the entire fund in low risk or risk free securities such as Government bonds, and high-grade corporate bonds. These bonds are called fixed income securities, because they pay a fixed rate of return. Usually the returns are average to low in traditional policies because of their conservative nature.

    ULIPs, on the other hand, are insurance and investment bundled together. A part of the premium goes towards insurance coverage while the remaining part is invested in a mix of equities and debt. The mix offers various options. Some ULIPs have higher proportion of equities than debt; some have higher proportion of debts than equities.

    Charges in ULIPs
    Mortality charges: As explained, ULIPs provide insurance and investment bundled together. Hence, mortality charge is the charge for providing insurance coverage. The rate is calculated after factoring in your age, health risk and mortality table referred by the insurer.

    First year allocation charges and administration charges: This is the major charge in any ULIP scheme and levied during the first year. This includes various charges such as underwriting, agent’s commission, any other costs associated with processing, fund allocation, etc. come under this heading. The premium allocation can be as high as 7.5%.This is the highest charge and charged once.

    Yearly administration charges: The Company charges for administration expenses every month. This is charged for all the administration that goes behind managing your policy.

    Fund management & related charges: As explained, a part of the premium goes towards investment into a mix of equities and debts or mutual funds. Since this requires active management, a fund management fee is charged from investors. This is annual charge and it should not exceed 1.5% as per IRDA guidelines.

    Moreover, ULIPs provide lot of flexibility in scheme selection, changing schemes, partial withdrawal, and premature closure. All these flexibilities come at a cost though and are levied to carry out this transaction.

    Here are the typical charges on these changes:

    Partial Withdrawal Charges: Differs with vendors. This causes penalty for investors.

    Premature closure of ULIP: No charges after 5 years.However, the charges are a percentage of the value Before 5 years of buying of ULIPs.

    Changing scheme underlying the product: Changing scheme can cost you anywhere between Rs 100 and Rs 500. Switching of schemes can be done at the specified interval. Some vendors do not charge anything for this.

    Overall, IRDA has capped the average annual charge to 2.25% for long term. This regulation has made ULIP a much better product.

    Charges in traditional insurance
    The major expense in traditional insurance is agent’s commission. It can be as high as 35% in the first year for a plan with tenure of 15 years or more. This reduces in the second year and third year t0 7.5%, and 5% for the subsequent years. This is taken as soon as the premium is paid. Hence the money invested is the premium minus the commission.

    There are other charges like mortality charges, but they are not disclosed in the same way as ULIPs. All that is done is that the company pays the sum assured and bonus. The bonus is nothing but the value of your investment after all the charges in managing the policy are deducted.

    Important points
    The illustration that you see in the brochure is given based on your premium. However, in reality, you get the returns on the money invested from your premium after deducting all the charges associated with managing the scheme.

    For example, the table might show 6% return or the premium of Rs 1,00,000 in the first year and shows a figure of 1.06 Lakhs. However, if the agent commission is 25% in the first year, the company invests only Rs. 75,000 in the first year and your final value at the end of the first year at the rate of 6% should be about Rs. 79,000.The same calculation applies in every year.

    Hence look at all the charges before investing. There is a separate section about this in the brochure of the scheme. Please go through it before you put your money.


    Other Investment Option
    Bank Fixed Deposit
    When it comes to investments, one of the most popular investment options is the bank fixed deposits or FD’s. Everyone from a small investor to a high net worth investor usually have some quantum of investment in a bank fixed deposit. Bank fixed deposits are available with both public and private banks with a period ranging from as small as one week up to ten years. The interest rate on bank FD investments depends on the amount, the tenure of the deposit and the prevailing interest rates.

    An investor can seek a loan against their bank fixed deposit at any point during the investment tenure. Banks offer loan between 85 to 90% of the deposit amount while keeping the investment intact. Banks offer a higher rate of interest on FDs to senior citizens above the age of 60 years making it a viable investment option for the elderly. The fact that fixed deposits are backed by the Reserve Bank of India with a secured investment value of Rs 1 Lakhs makes them a safe investment option for all types of investors.

    If tax savings is on your financial wish list you can opt for tax saving fixed deposits that come with a lock in tenure of 5 years with no premature withdrawal or loans. Investments in such fixed deposits up to a maximum of Rs. 1.5 Lakhs for tenure of 5 years are eligible for tax deductions under Section 80 C of IT Act.

    Company Fixed Deposits
    Company fixed deposits are another good small savings instrument popular with medium to high risk investors. Just like bank fixed deposits, companies offer fixed deposits by seeking money from the investors for a short tenure ranging between 6 months to three years. On an average the interest rates offered by such company FDs are 1 to 3% higher than bank fixed deposits making them attractive proposition for many investors.

    Unlike bank fixed deposits which allow investments from a low sum, the minimum investment amount for company FDs vary from one company to the other. While some companies allow a minimum investment of Rs. 2,000 others may have a minimum investment cap of Rs. 25,000 or higher.

    Company FD's however come with a high risk compared to bank fixed deposits and are not secured or guaranteed by RBI or by the government of India. All company FDs are governed under the Companies Act under Section 58A. This means that company FDs are unsecured deposits and the investor has no way to recover investments if the company defaults or winds up operations. So checking the track record and previous history of the company is essential before investing in Company FD and not get lured in by any high interest rate on offer. Many banking and non banking financial companies offer Corporate FDs which are backed by reputed rating agencies, thus reducing the risk factor.

    Recurring Deposits
    If you are looking for an investment option allowing a deposit for a small amount each month, a recurring deposit or RD is a good small savings instrument for you to consider. Recurring deposits commonly known as RD's are offered by both banks and post offices.

    Under a recurring deposit account you will need to invest a fixed sum of money in your RD account each month. The minimum period of investment is 6 months while the maximum tenure can go as high as 10 years. Your investment gets a fixed rate of interest on the invested amount as per the tenure of your investment. The one big benefit of RD is the fixed nature of rate of interest. Since the rate of interest is fixed, you can make use of RD's to build a desired corpus for any future financial need. For example if you need to save Rs. 20 Lakhs for your child's marriage in the future, an investment in RD will allow you to know the exact amount to invest per month for the desired years to reach your financial goal.

    On the downside however partial withdrawals are not allowed for RDs making the investment less suited for a financial emergency. The interest rates for RDs are also lower than bank fixed deposits making them offer lower return on investments compared to bank FD. TDS deductions are also applicable if interest is more than Rs. 10,000 for one year. The Interest earned by RD investments is added to your annual income for income tax computation.

    Mutual fund SIPs
    Mutual fund Systematic investment plans or SIPs are another good way to invest periodically with investments each month instead of a lump sum investment. Mutual fund SIPs allow investment from as low as Rs. 1000 per month and a choice to choose between debt and equity mutual funds as per the risk profile of the investor.

    Choosing to invest in equity mutual funds is a good way to make use of the financial market boom and ensure your investments are well managed by experienced fund managers. What's more being market linked, the returns for equity based mutual funds are usually higher than investment in debt instruments like bank FD’s and RD’s.

    Investing a fixed amount of money every month towards any investment allows you as an investor to purchase more units when the price of the investment is lower. This reduces the average cost of purchasing making SIP as a better investment plan compared to a lump sum investment. Also if you are looking for a long term investment option, mutual funds offer you an added taxation benefit. All investments over one year are free from any capital gains tax. Know that the one year period must be calculated for each individual block of investment or SIP and not one year from the first SIP invested in the mutual fund.

    With market linked equity mutual fund returns can go up and down as per the market rates and hence offer no assured returns on year. Debt mutual fund offer a slightly conservative rate of return and are less volatile than equity based mutual funds as they invests in safer debt financial instruments.

    Non-convertible Debentures (NCD)
    While bank FD’s remain a popular investment option, companies sometimes offer non convertible debentures or NCDs offering higher interest rate than bank FDs making them a high risk high reward investment option. The average interest rate for NCDs can range from anywhere between 8 to 12%. NCD’s offer fixed interest rate for a specified tenure.

    Just like a corporate fixed deposit, the risk for investment in non secured NCD is quite high as there is no security in the event a company defaults. Companies however get themselves rated by reputed agencies like RISIL, ICRA, CARE and Fitch Ratings before announcing NCDs. Most NCDs offer annual and cumulative payouts.

    NCD are listed on stock exchange and investors can sell NCDs before the maturity period if they so desire. Depending on the current interest rate, NCDs can earn a premium or sell for a loss for the investor. The interest earned by NCD is clubbed with the annual income of the investor as tax as per the prevailing tax bracket. For NCDs traded on stock exchange, a short term or long term capital gains tax as applicable is levied depending on the holding period of the NCD.

    Senior Citizen Savings Scheme (SCSS)
    Senior Citizen Savings Scheme (SCSS) is a good small savings investment option for the elderly. If you are 60 years of age or above or 55 years or more but less than 60 years and retired on superannuation or under VRS, you can invest in SCSS. Since retirees are not always eager to invest their hard earned capital in equity based instruments, SCSS allows safer alternative for investments up to Rs 15 Lakhs. An investor can open an individual account or opt for a joint account with spouse under the scheme.

    Just like a savings bank account each investor gets a passbook containing all investment details for SCSS account. The interest rates offered on investment are reviewed every quarter by the Ministry of Finance. Currently from 1st July 2017, SCSS investments offer an 8.3​% rate of interest per annum payable from the date of deposit. The rates were left unchanged in the recent review as on December 2017.

    The maturity period for investments made under SCSS is fixed at 5 years with a premature closure permitted after one year of investment on deduction of an amount equal to 1.5% of the deposit and after 2 years with a deduction of 1% of the deposit. The investor has the option to continue investment for 3 more years after the 5 year maturity period if desired. Investment in SCSS qualifies for tax deduction under Section 80C of the Income-tax (I-T) Act. TDS deductions are however applicable if interest is more than Rs. 10,000 for one year.

    National Savings Certificates (NSC)
    National Savings Certificates (NSC) allows investments from individual investors or on behalf of a minor investor. The money invested in National Savings Certificates is used by the government for various developmental works. The investment must be made in denominations as designed by the government for each certificate type. Currently the government offers investment in 5 Years National Savings Certificate (VIII Issue) designed exclusively for government employees, businessmen and other salaried classes.

    As an investor if you buy National Savings Certificates (NSCs) every month for five years and re-invest on maturity you can get a monthly pension as and when the NSC matures. From 1.01​.2018, interest rates for NCS is fixed at 7.6​% compounded annually but payable at maturity. This effectively means that every Rs.100 you invest in NSC it grows to Rs. 144.23 after 5 years.

    The core essential benefits of why investing in NSC makes financial sense includes no maximum limit for investment. NSC also offers no tax deduction at source (TDS) as well as the certificates can be kept as collateral security to get loan from banks and financial institutions in the event of any immediate financial need. All deposits made in NSC are qualified for tax deductions under Sec. 80C of IT Act.

    Sukanya Samriddhi Accounts
    If you are parent or guardian of a girl child and worried about the future financial expenses of your child, you can make use of Sukanya Samriddhi Yojana. Under the scheme you can make investments to meet the financial requirements for higher education and marriage of your girl child. Account can be opened up to age of 10 years from the date of birth and closed after completion of 21 years. Premature closure is permissible after the girl attains 18 years of age provided that the girl is married.

    Under the plan you can make a minimum investment of Rs. 1000 and a maximum investment of Rs. 1.5 Lakhs in a financial year. Deposits can also be made in lump-sum if so desired with no limit on the number of deposits in a month or in a financial year. With effect from 1-01​-2018​​ Sukanya Samriddhi Accounts offer an interest rate of 8.1% per annum calculated on yearly basis and compounded annually. Sukanya Samriddhi Accounts can be opened by investors both at banks as well as at post offices.

    Kisan Vikas Patra (KVP)
    Kisan Vikas Patra is a small savings instrument making financial investments easier for the common man. Kisan Vikas Patra or KVP can be purchased from any departmental post office and purchased by an adult individual investor for self or on behalf of a minor or by two adults. Kisan Vikas Patra's are available in denominations of Rs. 1,000, 5000, 10,000 and Rs. 50,000 with a minimum deposit Rs. 1000 and no maximum limit. The amount invested in KVP doubles in 118 ​months (9 years & 10​ months). From 1.01​.2018 KVP offer a rate of interest of 7.3% which is compounded annually.

    To make the investments user friendly, KVP permits transfer of certificates from one person to another as well as from one post office to another. What's more the certificate can be encased after 2.5 years from the date of issue. As a low-risk and guaranteed returns on offer KVP has been one of the popular small savings instruments with people of all budgets and investment horizons. Although the income from KVP is taxable but the assured returns of doubling of investment makes it a lucrative financial instrument especially in times of turbulent interest rates.

  • Q: What is a unit linked insurance plan (ULIP)?
    A: Unit linked plans or ULIPs are insurance plans that offer a dual benefit of insurance and investment for the policyholder. Part of the premium paid is used as a life cover protection while the other part is used for due investments in various market linked instruments. ULIPs invest in both equity and debt funds allowing for market linked returns for all kinds of investors from high risk ones to those seeking investments with medium to low risk.
    Q: What are the various types of ULIPs on offer in the market today?
    A: Unit Linked Plans are largely classified as per the death benefits offered by the plan. As per the death benefits on offer ULIPs are either Type 1 or Type 2. Type 1 ULIPs offer death benefits to the nominee or the policyholder, which is equal or higher of the Sum Assured or the fund value of the plan.

    For example, if Mr. A has Type 1 ULIP plan with a sum assured of Rs. 50 Lakhs and has paid the premium for 10 years. If his assimilated fund Value of Rs. 35 Lakhs, the nominee of Mr. A will get the higher of Sum Assured (Rs. 50 Lakhs in this case) or fund value (Rs. 35 Lakhs) as death benefits if Mr.A expires during the policy tenure.

    In Type2 UIP plans, the nominee is paid out a death benefit of Sum Assured along with the fund value of the fund on the day. So for the above example Mr. A’s nominee will get an accumulated sum of Rs. 85 Lakhs (Rs. 50 Lakhs +Rs. 35 Lakhs)
    Q: Why should one consider investment in ULIPs?
    A: ULIP plans are an important insurance cum investment tool offering good returns on account of investments in the equity market. The plans allow policyholders to switch between various funds as per their risk taking capacity to ensure the investment is personalized for each policyholder. The funds are managed by an experienced fund manger allowing for a professional insight into investments. A policyholder can also keep a track on the investments and net asset value of the insurance knowing details of returns accumulated till date. ULIPs also allow for a partial withdrawal facility after five years of investment in the plan. ULIP investments are eligible for tax deduction under Section 80C provided the premium paid is less than 10% of the sum assured. Death benefits paid under ULIPs are also tax free.
    Q: How are ULIPs different from endowment plans?
    A: The common charges associated with ULIP plans are as follows: Premium allocation charge: ULIP insurers charge a premium allocation charge from the policyholders. The charges are taken as a small percent of the premium paid. The funds from premium allocation charges are used to cover the initial charges of the insurer like distributor fee, underwriting cost etc. So if you invest Rs 5,000 each month in a ULIP plan with 2% premium allocation charge, Rs. 100 would be deducted upfront from the premium by the insurer.

    Policy administration charge: Policy administration charges can be either charged per month or as a flat rate for the policy term. These are the charges insurer seeks to offer the life insurance policy.

    Fund management charge: Fund management charges are levied to cover the expenses of fund management by the insurer. IRDAI guidelines have fixed a maximum upper limit of 1.35% per annum on fund management charges.

    Surrender charges: surrender charges are applicable if a policyholder plans to premature, partial or full encashment ULIP invested units Mortality charges: Mortality charges are the cost one needs to bear for getting an insurance cover. Age and Sum Assured are used to calculate the final mortality charges for a ULIP plan.

    Fund switching charge: ULIPs allow switching between funds from equity to debt components. While some switches are offered free for the year, additional switches call for fund switching charges. The amount can vary as per the plan and insurer involved.
    Q: What are the various charges linked with ULIPs?
    A: The common charges associated with ULIP plans are as follows:

    • Premium allocation charge: ULIP insurers charge a premium allocation charge from the policyholders. The charges are taken as a small percent of the premium paid. The funds from premium allocation charges are used to cover the initial charges of the insurer like distributor fee, underwriting cost etc. So if you invest Rs 5,000 each month in a ULIP plan with 2% premium allocation charge, Rs. 100 would be deducted upfront from the premium by the insurer.
    • Policy administration charge: Policy administration charges can be either charged per month or as a flat rate for the policy term. These are the charges insurer seeks to offer the life insurance policy.
    • Fund management charge: Fund management charges are levied to cover the expenses of fund management by the insurer. IRDAI guidelines have fixed a maximum upper limit of 1.35% per annum on fund management charges.
    • Surrender charges: surrender charges are applicable if a policyholder plans to premature, partial or full encashment ULIP invested units
    • Mortality charges: Mortality charges are the cost one needs to bear for getting an insurance cover. Age and Sum Assured are used to calculate the final mortality charges for a ULIP plan.
    • Fund switching charge: ULIPs allow switching between funds from equity to debt components. While some switches are offered free for the year, additional switches call for fund switching charges. The amount can vary as per the plan and insurer involved.

    Q: Are ULIPs high risk investments?
    A: With the equity investment component, there is a general perception that ULIPs are high risk investment options. The fact is that ULIPs allow for a switch between equity to debt components making it ideal for all investors including high risk and medium to low risk ones.
    Q: What is a ULIP NAV?
    A: Unit linked plan policyholders are offered units at the time of investing in a ULIP plan. ULIP funds have a net asset value or NAV which is the value for each fund of the plan for the day. ULIP NAV's are listed o the fund websites for the policyholders to ascertain the value of their investments.
    Q: Do ULIPs offer any tax benefits?
    A: Yes. ULIP investments are eligible for tax deduction under Section 80C provided the premium paid is less than 10% of the sum assured. Death benefits paid under ULIPs are also tax free.
    Q: DO ULIPs offer partial withdrawal facility?
    A: ULIPs allow partial withdrawal option to take care of any liquidity needs post the mandatory 5 year lock in period. With every partial withdrawal the overall sum assured component of the policy gets reduced
    Q: Can one take a loan on a ULIP plan?
    A: As per the guidelines of insurance regulator, IRDAI, ULIP plans are not eligible for any loans. Pre 2009 issued ULIPs may however qualify for loans with insurers offering a maximum of up to 50% of the current fund value as loan amount.
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