I had started writing a series on ULIP but it had got interrupted as I thought some other posts will be more relevant. Readers who are interested in the previous posts can read them to get an idea of why the older ULIP’s were a bad idea and how the different charges connected with them work.
As ULIP is an unique product it can be used in a very innovative way, by taking advantage of insurance and market linked growth combination. Let me give you an example below in order to demonstrate how it can be used:-
- Suppose you are planning for your child’s education in college which is 15 years away. Normally you will do some SIP in MF to achieve this goal.
- The risk in above is something unfortunate happening to you, in which case the SIP may stop. This can be taken care of through insurances that you will have. However, as the insurance is not linked to the specific goal, someone will still need to manage the process of continuing the investment on your behalf.
- An alternative can be to use ULIP. If your goal is 20 lacs in current money terms, take a policy with an equivalent life cover. Keep paying the regular premium.
- If at all, something untoward happens the amount received can be simply put in a debt fund so that it grows to a reasonable level by the time the goal comes.
- If you go for an online ULIP then the policy allocation charges are quite low. This will ensure that the overall cost structure of the ULIP is low.
- Note that ULIP and MF both invest in the same underlying asset class. As such there is really no reason why an ULIP will under perform an MF. The real problem is with the charges and that has got addressed to a large degree now.
I am not saying that you should or should not look at ULIP as an investment product. However, in the changed form it does offer you a lot of flexibility and benefits. In order to convince yourself, look at the performance of some of the recent ULIP for yourself, both in terms of the returns as well as the charges.
You may then well start wondering as to why you have not thought of it earlier !!