ULIPs are a popular financial instrument that come with two-pronged benefits of insurance and investment. ULIPs can fulfill the two financial goals of financial protection for one’s family as well as wealth creation.
However, it is important to ensure that a ULIP fits into your investment strategy before you make it a part of your financial portfolio. However, to make the most of your ULIPs investment, you need to take care to avoid certain errors that might hamper your ability to maximize benefits.
Here are some common errors to avoid when purchasing a ULIP:
- Not taking into account your risk-exposure: ULIPs are market-linked instruments which means that you can benefit from exposure to equity for higher returns. However, it is advised to choose the allocation of funds in tune with your risk-taking ability as well as how far your life goals are. Do not randomly allocate funds in equities since higher returns come with proportionate risks as well. You can choose between equity and debt as per your preference as well as switch from one fund to another if you are looking for safety. Be aware of the various choices available to you to allow for the flexibility of investing.
- Stay invested for the long run: This is one of the most important mistakes to avoid when buying ULIP. If you stop paying the premium anytime during the policy period, the insurance cover becomes null and void. If premium payment ceases before the 5 year lock-in period, you still won’t be able to withdraw it and the amount payable at the end of 5 years will be computed on the net asset value of the year in which premium was stopped. Also, various charges related to the policy will be deducted. Staying invested for the long run helps you average out the various charges as well as create a significant financial corpus.
- Not taking into account your unique goals and objectives: A ULIP that suits one investor may not align with the goals of another. Choose a plan that is in line with your financial responsibilities, long term plans, risk appetite and liquidity needs in the future. Go for a hybrid fund if you are looking for the safe returns or an aggressive hybrid fund if you are willing to take a risk in the equities market. It is advisable that you list your financial priorities before beginning your hunt for the right ULIP and then go about picking one that meets these requirements.
- Failing to account for ULIP charges: Since ULIPs are a part-insurance, part-investment instrument, there are certain fees and charges that will be levied, in addition to the premium you pay. When choosing your preferred ULIP, it is essential that you take such charges into consideration while calculating your total outgo. After the introduction of new guidelines from the Insurance Regulatory and Development Authority of India ( the IRDAI), investing in a ULIP has become even more cost-effective. This investment tool with a dual benefit of investment with insurance, now comes with reduced premium allocation, administration, fund management and administration charges. ULIP charges are now capped at 3%. However, it is still crucial that you weigh the effect these charges will have on your finances and compare the charges levied across different plans.
- Investing only for insurance cover: It is always better to buy a pure life cover such as a term plan to protect you and your family from any uncertainties in the future. Not only do they come cheap, but also provide coverage in tune with your requirements. Insurance cover in a ULIP is usually 10 times the annual premium paid by you. It may or may not be sufficient for you. Moreover, the insurance benefit is no longer available if you stop paying your premiums for any reason. Hence, it is not wise to think of a unit-linked insurance plan as a substitute for life insurance.
ULIPs are an alternative investment option that you can utilize as per your needs to create wealth for the long term. The
Invest 4G Plan from Canara HSBC offers different portfolio strategies and fund choices to help you customize your policy as per your needs. Not only this, you can choose from death benefit options as well as switch and redirect funds to benefit from movements in the market.
So whether you are looking to fund your children’s education abroad, save for your retirement or fulfill any other long term goals that you may have, ULIPs can help you achieve them with ease.