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There has been plenty of change in the financial services sector during the last 12-18 months with the mutual fund and insurance industries going through regulatory changes. Most of these changes, aimed at making things more beneficial for the investor, have also brought these sectors one-step closer to their global peers. In the case of insurance, the changes have been more recent and to be precise, the new norms have begun to kick in from September, this year. Interestingly, the changes have been drastic and more importantly, they have been on fronts like product and charges. As a result, it is important for investors to build their insurance portfolio carefully as the options have been restricted on the unit-linked insurance plan (ULIP) front. In fact, companies don't have the luxury of launching products at their convenience as there is a cap even on new product offerings.

While traditional products continue to exist, the insurance sector, in the last decade has been dominated by the influence of unit-linked plans. With the coming decade being touted as the golden era for the equity markets, it is but natural for investors to have a go at the ULIPs. Understandably, even insurance companies feel tied down under the new regime. In the last two months, insurance companies have managed to bring innovations in their product offerings with many companies preferring the route of guarantee component. There have been a wide range of options in this segment - highest NAV, guaranteed NAV at the end of term etc. The common thread among many of the investment options is that companies have restricted their risk cover on investment products to a certain limit.

As a result, for pure risk cover, the term plan continues to be the first choice and rightfully so as an insurance product's job is to cover risk of death. This should be the first product in any core portfolio. However, the investors continue to chase returns from any savings/investments and hence the popularity of this option is still low here.

It is with this perspective that one can go in for a combination of insurance plans. Since the new product era offers a product in a much more cost-effective way, it is not a bad idea either. To start with, look at a term product as a tool for covering liability and future financial needs. The investment products or any other unit-linked insurance plans should be aimed for long term needs. For instance, a child's future needs can be funded through a combination of child plan and systematic investment plans (SIPs). While the former ensures continued investments even in case of death of the contributor, the latter assures liquidity, besides flexibility. For instance, a child plan should be serviced for a minimum period of five years while an SIP can be discontinued any time.

But investors with long-term needs and discipline can go in for insurance-linked investment options as in the current environment they are also much more cost-effective. For instance, a single premium investment product can work well in the long term as the fund management charges are either on par or even lower when compared to a mutual fund if you take into account the expenses ratio.

The biggest advantage with an insurance product is that the fund manager takes a long term view as he is under relatively less pressure to chase returns in the short term. This allows him to make some good long-term bets and go for value picks. This is also one of the reasons why insurance companies with a track record of nearly a decade have managed to deliver good returns for their investors. With rationalisation of charges and prospects of good years ahead for equity markets, the coming decade should enable investors of ULIPs to reap good returns.

Source: The Economic Times