Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked life insurance products are those where the benefits are expressed in terms of number of units and unit price. They can be viewed as a combination of insurance and mutual funds.

The number of units that a customer would get would depend on the unit price when he pays his premium. The daily unit price is based on the market value of the underlying assets (equities, bonds, government securities, et cetera) and computed from the net asset value.

The advantage of unit-linked plans is that they are simple, clear, and easy to understand. Being transparent the policyholder gets the entire upside on the performance of his fund. Besides all the advantages they offer to the customers, unit-linked plans also lead to an efficient utilisation of capital.

Unit-linked products are exempted from tax and they provide life insurance. Investors welcome these products as they provide capital appreciation even as the yields on government securities have fallen below 6 per cent, which has made the insurers slash payouts.

According to the IRDA, a company offering unit-linked plans must give the investor an option to choose among debt, balanced and equity funds.  If you opt for a unit-linked endowment policy, you can choose to invest your premiums in debt, balanced or equity plans.

If you choose a debt plan, the majority of your premiums will get invested in debt securities like gilts and bonds. If you choose equity, then a major portion of your premiums will be invested in the equity market. The plan you choose would depend on your risk profile and your investment need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is especially so if one also believes that current market values (stock valuations) are relatively low.

So if you are opting for a plan that invests primarily in equity, the buzzing market could lead to windfall returns. However, should the buzz die down, investors could be left stung.

If one invests in a unit-linked pension plan early on, say when one is 25, one can afford to take the risk associated with equities, at least in the plan's initial stages. However, as one approaches retirement the quantum of returns should be subordinated to capital preservation. At this stage, investing in a plan that has an equity tilt may not be a good idea.

Considering that unit-linked plans are relatively new launches, their short history does not permit an assessment of how they will perform in different phases of the stock market. Even if one views insurance as a long-term commitment, investments based on performance over such a short time span may not be appropriate.