This is a good time to invest in ULIP

This is a good time to invest in ULIPs, combining benefits of a life insurance policy & reaping the best from market upswing, says

 IT'S OFTEN hard to take a decision, especially when it includes forking out large sums of money towards investing in a market, which could take a downward turn any day. After all, you do not want to end up digging your own grave. So a couple of months ago, when financial experts began saying that people should look at buying stock at good valuations, you may have pushed the thought to the back of your mind.
    But now, with the semblance of stability returning to the government and the markets slowly inching their way up, the desire to invest has begun to set in. However, with many still wary of direct exposure to the market, investors have begun showing an interest in Unit Linked Insurance Plan (ULIP), which combines the benefits of a life insurance policy with possibility of reaping the best out of upward movement in the markets. But is this a good time for the retail investor to buy a ULIP? SundayET has the answers.
THE RIGHT TIME
If you're wondering whether you've missed up on the right opportunity to invest in ULIP, rest assured that your fears are unfounded. According to most financial planners, every time is a good time to invest in a ULIP, including the current scenario where markets are in recovery mode. In fact, Veer Sardesai, CEO of Sardesai Finance, says that on a psychological level, it is easier for an investor to park his funds now than earlier. "It is difficult for the lay investor to muster the courage to invest in equities at the bottom of the bear cycle (although that is the best time). Hence, today is a good enough time to commit to long-term equity investments," he points out.
    To a large extent, however, the choice of whether you want to invest in a ULIP or not, actually depends on your expectation from the product. Most financial planners reiterate that a ULIP is predominantly an insurance product with linkages to the market and should not be used to time the market. If your priority is to make short-term profits, then you are more likely to realize this goal by investing in a mutual fund or fixed deposits than a ULIP. According to Manik Nangia, corporate vice-president and head of product management at Max New York Life Insurance, "The sure shot way to get good returns from the ULIP, is to remain invested in the market for about 10-20 years, if not more." The rationale is simple and works on the basis of averaging. The longer you remain invested, you have the benefit of leveraging the losses of bear runs against the gains made during the bull runs.
    However, if you are comparing investing in a ULIP with investing directly in the market or in mutual funds, Sardesai warns that the initial charges of investing in a ULIP are fairly higher and may not be the most efficient way to invest in stock markets. For instance, up to 30% of your premium in the first year could go towards premium allocation charge and administration charges but this decreases in the subsequent years. In a mutual fund, however, the charges are extremely low in the initial phases. "Also, if you were looking purely at insurance, then it would make more sense to invest in a term insurance plan than a ULIP," adds Zankhana Shah, founder and owner of Money Care, Financial Planning.
THE ROSY PICTURE
However, you cannot deny that ULIPs give you the benefit of two birds in one shot: the security associated with the insurance component and the flexibility and the transparency associated with investments. ULIPs have a range of options available for customers ranging from the most aggressive to the extremely conservative products and give customers the benefit of being able to change their debt to equity ratio depending upon their risk appetite. In fact, most insurance companies allow individuals between four and eight switches a year without any charge. "However, these switches should ideally coincide with life-stage milestones. As a person gets closer to retirement, he could accordingly increase the allocation to debt within in his/her portfolio," says Nangia. For an extremely conservative investor, there is even the option of adding a capital guarantee clause in some cases. Also, if you buy a ULIP, then you can claim a tax deduction under Section 80 C of the Income-Tax Act.
WATCH OUT
According to most experts, the fundamental decision that people need to take while buying a ULIP is whether this in line with your risk appetite and complements your other investments. Evaluate factors such as your current income, your dependents and your lifestyle in mind. "If an investor has already bought sufficient insurance then going for ULIP may not be a good idea," warns Shah. Also you need to have a good understanding of the various charges that are levied and need to keep a track of the performance over a couple of years. If you have this information, you will easily be able to field yourself from the pitches of unscrupulous sellers who are likely to show you only the data pertaining to periods when the stock market was at its peak.
DOUBLE BENEFITS

• Combines security of life insurance with investment options

• Gives good returns over 10-20 years

• Allows you to choose debt & equity exposure according to risk appetite

• Allows 4-8 switches in the debt/equity ratio free of cost

• Gives tax deductions under Section 80 C of the I-T Act

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State Consumer Disputes Redressal Commission sets aside compensation to businessman who suffered losses during July 26, 2005, saying his policy did not cover flood damage since July 2004

This will serve as a warning bell to those who opt for insurance policies without paying attention to details.
    A Kalyan businessman – awarded Rs 2.25 lakh compensation from an insurance company after he suffered losses in the July 26, 2005, floods by the Thane consumer forum – will now no longer get that amount. The State Consumer Disputes Redressal Commission set aside the compensation, observing that floods were not covered by the policy, which was signed way before 26/7.
FLOOD DAMAGE
Yusuf Hussain Khan, who ran his plastic goods factory at Kalyan, availed the cash credit limit facility (a working capital loan) from the Kokan Mercantile Co-operative Bank. To secure their cash credit facility, the bank took an insurance cover from the Oriental Insurance Company. The bank would debit the insurance premium from Khan's cash credit account.
    From 2004, the insurance cover did not cover flood damages. However, during the July 2005 floods, Khan suffered damages worth Rs 2.5 lakh and requested the bank to give him a flood victim's benefit, which was turned down. Khan's plea to the insurance company was also rejected on the grounds that risk due to flood was not covered under the policy.
    Khan filed a complaint with the Thane consumer forum, which asked the insurance company to compensate him with Rs 2 lakh towards goods damages, and Rs 25,000 towards mental trauma. The insurance company challenged the order before the Commission, which set aside the Thane forum's order last week.
    The commission held, "The forum on its own has drawn a conclusion that… the policy documents had been tampered with [to remove the flood cover from the initial policy]." The commission held that the Thane forum, "committed a serious error to infer accordingly."
    The commission also observed that neither Khan nor the bank, had at any point, objected to the exclusion of the flood cover in the policy in 2004. The insurance company's rejection of the claim "is proper and cannot be faulted with," the commission ruled.

The compensation was denied to Yusuf Khan as the policy did not cover damage due to floods

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