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Over a decade ago, when private life insurance companies introduced unit-linked insurance plans (Ulips), nobody could have really anticipated how popular they would become in the years to come. In a sense, they were almost a considered afterthought, offering a new investment choice in insurance to a niche which had a higher risk appetite.

In FY11, of the Rs 125,458 crore total premium income, Ulips alone accounted for a significant Rs 52,944 crore. Their attractiveness to investors can be understood better when viewed through the prisms of their relatively lower costs, better returns potential arising from their market linkage, greater flexibility compared with other savings products, transparency and unmatched proposition as a long-term savings tool.

The upfront and embedded costs in Ulips are extremely competitive when compared with other products in the asset management space. The major charges in a Ulip include premium allocation charge, policy administration charge, mortality charge, guarantee charge in case of guaranteed products and fund management charge (FMC). FMC - a constant feature across all asset management platforms - of insurance companies are among the lowest among competing platforms. As per regulatory norms, the sum of all charges should not exceed 3 per cent for periods up to 10 years and 2.25 per cent for periods above 10 years.

Ulips offer a choice of funds in the debt and equity space. The choice of either is usually a reflection of the investor's risk appetite and investment objectives. As an asset class though, equity offers significantly higher returns over the long term. At the same time, it is riskier. However, investors, who stay invested over the long term in either, stand to reap richer benefits from the power of compounding and rupee-cost averaging.

Equity investments through Ulips, typically, witness higher interest vis-à-vis debt. For investors, who do not have the wherewithal or risk appetite to invest directly into the secondary market, Ulips afford professionally managed exposure to equity, along with insurance cover and tax benefits. The combination of higher return potential, life cover and tax benefit, which a Ulip affords, is unmatched.

Further, the investment returns are enhanced given the broadly even spread charges through the policy term and the higher initial allocation. Also, there are no sudden redemption pressures due to the way the product is structured enabling fund managers to manage investments better. Investments in insurance and proceeds at maturity are also tax exempt at present.

Investors can choose from single premium plans, where they could make a one time investment or choose to systematically invest monthly, quarterly or annually. Besides debt and equity, there are several plans today which proffer dynamic investment allocations, changing the debt to equity ratio depending on market conditions to minimise risk. Investors, on their own accord too, can switch between funds to better manage their investment portfolios without attracting provisions of capital gains tax.

Switching can be used for reasons ranging from crystallising the value of one's assets as a hedge against corrections. Every Ulip offers a fixed number of free switches, which varies from company to company and product to product, above which there is usually a charge of Rs 500 per switch. The new guidelines have also capped surrender penalty, ensuring greater liquidity for the investor.

While Ulips tend to compete for the same financial savings pie as bank deposits and mutual funds, the fact is that they occupy a distinct and as yet non-competed space - like long-term savings. As a long- term, market-linked investment tool, Ulips have no parallel, since, they are specifically designed and structured to benefit the investor in the long term. Given the long-term orientation, new regulations have stipulated a lock-in period of five years. Ulips are extremely transparent products and tells the customer where his money is being invested and what charges he is paying.

Insurers also disclose fund performance, wherein, they highlight the sectors a fund has invested in, and in some cases, even specific stocks. Allocation of charges through the policy term enable the customer see a gradual build-up of funds over time, enthusing him to pay his premiums regularly and stay invested for the entire policy duration to reap the full benefit. The appetite for market-linked products has witnessed steady growth over the years and the trend is expected to continue. The new regulatory environment has made Ulips extremely customer-friendly and transparent. Customers benefit from the trine of life insurance, market-linked investment returns and tax benefits. The greatest appeal lies in its potential as an extremely effective tool for financial life-cycle planning, incorporating the best features of other competing platforms in the savings space.