ULIPs: A holistic risk management tool

According to Investopedia, risk management in finance is the “process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions.” The average person usually associates risks with death, disability and critical illness. Though these risks have obvious financial repercussions, we seldom give much thought to the financial risks arising out of financial indiscipline and market volatility.

As our investment plans are influenced by our outlook towards life, we don’t give much importance to risk management either. As Warren Buffet says, “risks come from not knowing what you’re doing,” and the risks are pretty high if you have a gambler’s approach towards investing. Not utilizing risk management to mitigate the uncertainty of your investment decisions is akin to gambling, a risky activity.

Financial risk management is gaining more and more importance due to the uncertainty and volatility in financial markets that we are witnessing worldwide. As an investor you have a potent and holistic risk management tool in the form of unit-linked insurance plans (ULIPs). The amazing thing about ULIPs is that it covers all the risks – death, disability, critical illness, market volatility and financial indiscipline – quite effectively. Let’s understand how ULIPs can be utilized as a holistic risk management tool.

What are ULIPs?

Before we dig deeper, let us first get a simple understanding of ULIPs. In a unit-linked insurance plan or ULIP, as the name suggests, every unit (called the NAV) held by the investor is linked to an underlying market-linked product such as equity or debt funds.

When an investor pays the premium for a ULIP, a portion of the money goes to providing life insurance cover for the investor and the remaining amount is invested in various debt and equity funds according to the investor’s preference. As the value of the underlying fund grows, it is reflected by an increase in the net asset value (NAV). Therefore, ULIP investment plans provide the dual benefit of life insurance protection and wealth generation to the insured.

Bajaj Allianz Future Gain is a unit-linked endowment insurance plan that assures maximum premium allocation for better returns; comes with choice of 2 investment strategies; and offers unlimited free switching of funds.

How are ULIPs a holistic risk management tool?

Managing life risks

A unit-linked insurance plan, while managing life risks by providing life insurance coverage, can also protect your income in case of critical illnesses or permanent disability. All you have to do is add a rider by paying a little extra. In that way, it gives you comprehensive life cover while helping you build your corpus in the long-term.

Encourages financial discipline

As ULIPs come with a specific lock-in period, it encourages financial discipline by rewarding you with good dividends for not using the funds indiscriminately. It also inculcates a habit of regular saving as you keep aside a certain amount to pay for the ULIP premium.

Freedom to mitigate investment risks

ULIP investment plans give you the freedom to switch funds to mitigate risks during volatile and uncertain market conditions. You can reduce your equity exposure and lean more towards debt and balanced funds to manage risks and tide over market volatility.

Some insurance companies charge you extra for switching of ULIP funds. However, Bajaj Allianz Future Gain available on Finserv MARKETS acts as a cost-effective risk management tool by allowing you Unlimited Free switching of funds.

Reduces tax liability

We seldom see tax as a financial risk but as Benjamin Franklin puts it, “In this world nothing can be said to be certain, except death and taxes.” Tax can be assumed as a risk because it significantly impacts your savings. A sudden change in taxation rules can have an adverse impact on your corpus.

ULIPs is a very effective tax savings tool as it is an EEE (Exempt, Exempt, Exempt) category investment instrument. You can enjoy ULIP tax benefits in three ways: First, the premium amount that you pay is tax deductible. Secondly, the increase in value of your funds or NAV is tax exempt. And finally, the maturity benefit or withdrawal amount is free from income tax. Thus, ULIPs help lighten your tax burden considerably.

A unit linked insurance plan is a life insurance, investment and risk management tool rolled into one. With a well-planned method of growth, accumulation and withdrawal, ULIPs offer you the opportunity to grow your wealth by leveraging the power of market-linked instruments. At the same time it empowers you to be proactive and mitigate risks by reducing exposure to equities.