A regular income for the post-retirement life is a common concern that haunts everyone. It is a little bigger worry for we Indians, who have a habit of not thinking too much about retirement when they are active and working.

To be able to retire with an adequate corpus, one first needs to get organised with his/her finances. This means thinking about how you want to live post-retirement, assessing your current assets and investments and taking maximum advantage of investment plans designed to provide retirement benefits. One such investment vehicle is Unit Link Insurance Plan or ‘Ulip’.

Ulips have gained a lot of popularity as it provides dual benefits-a life insurance cover and an investment opportunity to create wealth.

A unit-linked plan is insurance cum investment plan where the returns are linked to market. The most distinguishing feature of a unit linked policy is the separate identification of the parts of the policy.

That is, the investment element, expense and administration charges, and benefit charges (e.g. mortality charge), as well as the benefits themselves are clearly identified to the policyholders. Insurers send the unit status and performance of the Ulip, including explicit reporting of charges taken from and investment returns allocated to the policy.

In Ulips policyholders can check the value of the units on a regular basis and see how the investment is performing. This is an important feature which adds more transparency to the product and makes it easier for customers to understand how his /her money has grown.

Ulips work in following way:- Premiums > Charges are deducted > Balance premium is then invested in buying units in funds selected by the policyholder > Units can be cashed out to make withdrawals and/or payment of benefits like maturity/death.

A major portion of your premium is invested in a fund/s type (equity/debt or a combination of these two) that has been selected by you. At any point, the fund value is impacted by the performance of the underlying asset. On maturity, you will receive the proceeds depending on the net asset value of your fund on that date.

Advantages of a Ulip

Transparency: The transparent nature of a unit-linked plan has a major appeal to policyholder who wishes to monitor the progress of the value of their investment. The cash value of the policy at a particular point in time is clear to the policyholder.

Clear components

The investment and insurance elements of the policy can be controlled separately. Policyholder can structure their insurance benefits to meet their exact needs (taking different level of insurance cover), control the amount that will be invested and the nature of the investments.

Control over the investment strategy

The policyholder may control the degree of investment risk by directing premiums to the funds most appropriate in relation to their risk tolerance. Ulips offer varied range of pure equity funds, balanced funds and debt oriented funds, each with different return and risk score. Policyholders can select which fund the premiums are to be invested.

For example, if someone wishes to take more risk by investing in an equity fund, he would also expect to earn better returns over the long term. In case, the fund performance is not up to satisfaction of the policyholder, he/she can redirect future premiums in any other fund offered with the Ulip or can switch his monies from one fund into another.

For retirement planning, it’s important to invest in equities. Typically equities tend to give better long-term returns than debt instruments. So, trick is to initially invest in equity fund and 3 to 5 years before maturity of plan switch to debt funds. This will preserve the gains from equity funds.

Partial withdrawals

Another important feature of a unit-linked policy is liquidity. Usually after a period of five years insurers allow policyholders to withdraw certain units to meet either anticipated or unanticipated expenditures needs.

Top-ups

In case of unit-linked policies the policyholders can make additional investments by way of top-ups to increase their savings component. This acts a good investment avenue for policyholders to park their surplus cash.

Goal-based investment

Ulips can be handy in helping you achieve your long term goals like creating retirement kitty. The maturity value can be used to buy pension or annuity as per your need.

The key for retirement planning is to start early, stay invested and take frequent checks at the fund growth. Don’t delay the investing, the later you start the lesser you will have.

(Sanjay Tripathy heads marketing and direct sales channels as an Executive Vice-President at HDFC Life, one of India's leading private life insurance companies that offers a range of individual and group insurance solutions.)