Investment mandate

ULIPs differ significantly from traditional endowment plans in the way they invest their monies. ULIPs have an investment mandate, which allows them to 'shift' assets freely between equities and debt. This is unlike saving-based plans like endowment plans, which invest pre-dominantly in specified debt instruments like bonds and government securities. The amount of money invested in equity has the potential to make a significant difference to the returns that the plan can generate over the long run.

Click here to understand how a ULIP's equity component makes a difference

However, ULIPs with a higher equity component can prove to be very volatile customers during stockmarket turbulence. So investors have to be sure that their risk appetite coincides with that of the ULIP. For this, make a note of the maximum equity allocation the ULIP can take on.

There are several options within a ULIP. You can select the option that best fits in with your risk profile and helps you achieve your investment objective. If you are an aggressive investor you can go for a ULIP with the maximum equity allocation - this varies from insurer to insurer but is usually in the range of 70 per cent-100 per cent of assets. If you are a conservative investor then you can opt for a ULIP option that has a smaller equity allocation of about 20 per cent.

ULIP expenses

A lot has been written about ULIP expenses in the past. At the cost of sounding repetitive, ULIP expenses do make a difference to the returns. This gets more evident over the long run. Expenses take a toll on the returns by way of reducing the amount, which gets invested. A lower amount will yield lower returns.

ULIP expenses are broadly classified into annual expenses (excluding fund management charges - FMC) and fund management charges. The annual expenses are deducted from the premium amount and hence, that part of the premium which is net of annual expenses is invested. While annual expenses are high in the initial years, they even out in the long run (typically 15 years and above).

Click here to understand how ULIP expenses affect returns

FMC on the other hand, is levied on the corpus till date. A higher FMC therefore means a reduction in the corpus that can generate returns going forward. FMC therefore makes a sizable difference to the returns in the long run.

Miscellaneous features

ULIPs offerings also differ across companies in terms of the flexibility offered across various parameters. For example, the minimum premium for one insurance company is Rs 10,000 while for another, it is Rs 18,000. Also, some insurance companies let individuals alter their equity: debt allocation 5 times a year at no additional cost while other companies allow alteration only twice during the year (without additional costs).

The charge on top-ups also differs- a certain insurance company invests 99 per cent of the top-up amount (1 per cent is deducted as top-up charges) while another company deducts 2.50 per cent as top-up charges, investing the remaining 97.50 per cent. Such differences need to be considered before individuals zero-in on a ULIP product.

Focusing on your asset allocation

Individuals also need to stick to their asset allocation plan at all times. It has been noticed that ULIPs are often bought by individuals without having an understanding of the value that they bring to their financial portfolio. If their current asset allocation is skewed towards equities (i.e. mutual funds/stocks), then what the individual may really need is a term/endowment plan. Conversely, if the portfolio is debt-heavy, then the individual can consider investing in a ULIP with a significant equity allocation.