Let's begin first with what ULIPs can do for you. A ULIP, as the name suggests, is a market-linked insurance plan. The difference between a ULIP and other insurance plans is the way in which the premium money is invested. Premium from, say, an endowment plan, is invested primarily in risk-free instruments like government securities (G-Secs) and AAA rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and gsecs.

ULIPs offer a variety of options to the individual depending on his risk profile. For instance, an individual with an above-average risk appetite can choose a ULIP option that invests upto 60 per cent of premium in equities. Likewise, an individual with a lower risk appetite can select a ULIP that invests upto 20 per cent of premium in equities.

While there are no two opinions on the flexibility that ULIPs afford to the individual, ULIP costs are another issue altogether. An example would make things clearer.

Suppose an individual, aged 30, wants to invest money in a ULIP from an insurance company, ABC Ltd. The sum assured is Rs 200,000 and the tenure is 10 years. He has opted for 100 per cent investment in equities i.e. he has opted for the aggressive growth fund option. The annual premium in this case works out to approximately Rs 19,000.

The following table gives a clearer picture of the cost breakup for ULIPs of ABC Ltd. and what amount is invested to generate returns.

From this premium, approximately 25.0 per cent is deducted on account of various charges in the 1st year by ABC Ltd. Sales and marketing expenses would account for 15.0 per cent, annual fund management fees 1.5 per cent and administration expenses another 7.0 per cent.

The rest (1.5 per cent) would go towards covering mortality charges, underwriting charges and other charges as may be applicable. This means only Rs 14,250 (75 per cent of Rs 19,000) worth of premium is invested in the portfolio of the investor's choice in the initial year. After the first year, these charges fall down to around 11.5 per cent of the premium. This means approximately Rs 16,815 (88.5 per cent of Rs 19,000) would be invested.

The charges stated above would remain the same irrespective of whether the individual has invested in debt funds or equity funds. Only the fund management charges would vary.

If the same individual were to invest in a ULIP of another company, XYZ Ltd, a net of 27 per cent each year would be deducted from his premium for the first 2 years and the remainder would be invested. Third year onwards, these charges would fall to approximately 5 per cent.

It is pretty apparent that investing in ULIPs from company XYZ Ltd would make more sense than investing in ULIPs offered by ABC Ltd. This is due to XYZ Ltd's significantly lower costs third year onwards, despite higher costs in the initial period. As can be seen from the table given below, the total premium invested by XYZ Ltd over a 10-year period is Rs 172,140 which is higher than that invested by ABC Ltd (Rs 165,585). This means that your money works harder for you in XYZ Ltd than if invested in ABC Ltd.

'Net investment' comparison for ABC Ltd v/s XYZ Ltd

	ABC Ltd (Rs)	XYZ Ltd (Rs)
Premium for years 1 & 2	190,000	190,000
Actual amount invested in years 1 & 2	165,585	172,140

(The ULIP costs are based on those of existing life insurance companies. The costs could vary for other companies).

An important point to be noted here: Returns announced by most companies on ULIPs are on net premium (i.e. gross premium minus all expenses) and not the actual premium paid by an individual.

An individual also has the choice to switch between various fund options. For example, if he feels that the equity markets are too hot for him to handle, he could switch to a debt fund. Most companies normally allow individuals to switch, a fixed number of times annually free of cost. Later, they charge approximately Rs 100 per switch. This cost too, has to be factored in while talking of implications on the overall cost of investing in ULIPs.

Individuals therefore, when they decide to buy a ULIP, need to take these costs into consideration as they have a long-term implication on the returns generated.

While the need for insurance is paramount in a person's financial portfolio, it would be advisable for him to understand his own risk appetite at the very outset and the cost he will incur on investing in the unit-linked product.

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