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5 mistakes to avoid when buying a ULIP

5 mistakes to avoid when buying a ULIP

buying a ULIP plan

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 Oriental Bank of Commerce 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.

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Annual Income (In Lacs)


In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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