ET Markets demystifies the jargon surrounding insurance and provides a handy guide to get the best bang for your buck in this special issue. Unit-linked insurance plans (Ulips), at one time among the most-maligned investment products, have given positive returns to policyholders over a fiveyear period.

Tata AIA Life’s Whole Life MidCap Equity Fund has, for instance, returned 19.59% in that period. Ulip funds of IDBI Federal Life Midcap Fund, Bajaj Allianz Life Pure Stock Fund, Reliance Life Midcap Fund and Birla Sun Life Individual Multiplier Fund have returned 15-18% over five years.

While young policyholders opt for pure equity products, there are various categories of Ulips including sector funds, equity funds and fixed-income funds.

“A lot of younger policyholders are choosing to buy into equity funds as they understand that equity helps them create wealth to meet their long-term goal,“ said Sashi Krishnan, chief investment officer at Birla Sun Life Insurance. For middle-aged investors, some portion of their asset allocation is now in equities, unlike in the past. Investors now better understand that equity is a volatile asset in the short run and that they need to stay invested in it for longer periods of time, said Krishnan.

In Ulips, units get deducted on a monthly basis for policy administration and mortality.Fund management charges are deducted from the net asset value (NAV) of the fund.

Investors have been wary of Ulips due to the complex nature of the product and the various charges involved. At some companies, a substantial part of the first-year premium goes toward the premium allocation charge. Ulips have a lock-in period of five years and premiums are tax-exempt under Section 80 C of the Income Tax Act. Maturity proceeds are also tax-exempt, giving Ulips an edge over many other financial instruments.

Most insurance companies invest for a longer duration.“We identify stocks and stay invested in them as long as the underlying thesis does not go wrong,“ said Aneesh Srivastava, chief investment officer of IDBI Fderal Life Insurance. “We don’t churn the portfolio and believe in a longterm strategy .“

Ulip holders can switch between funds for free up to a limit and thereafter for a charge. “Generally, people don’t use switches,“ said Srivastava. “Very few active policyholders use switches in times of extreme volatility .“