Investing in a ULIP requires you to pay a fixed premium for the selected cover amount and while some portion of the paid premium is used for providing insurance coverage, the remaining portion is invested in a debt or equity instrument. When it comes to saving money and making financial decisions, it is normal human nature to gravitate towards products that have “more” benefits. This is where Unit Linked Insurance Plans (ULIPs) fit just right; they pack multiple benefits in a single investment and also ensure significant returns. ULIPs offer dual benefits of providing individuals with an insurance cover in addition to acting as an investment solution, helping them create wealth to meet their financial goals.
First things first, you should be fully conversant with how do ULIPs actually work. As an investor, you have the flexibility to choose between equity, debt and balanced fund option for your ULIP investment plan. Additionally, you can also choose to switch between investment plans during the course of the premium payment term. Fund managers assigned to your ULIP Plan are responsible for managing your investment according to the fund type and invest in debt or equity instruments. Also, it is important to note the facts that the lock-in period for ULIPs is 5 years and its performance or ability to generate returns is linked to the markets, as per the IRDAI.
In a ULIP investment setup, the policyholder has to bear the volatility of market risks. To be prepared, you need to start by knowing your risk appetite and determine your financial commitments before investing in a ULIP plan. Based on your risk appetite, you can choose an appropriate fund option ranging between low to high risk. The hostile side of fund options come with funds predominantly invested in equities, which improve your returns. On the other hand are lower risk fund options like market securities and debts to get steady returns. You also have fund options in-between, where 40-60% is invested in equities and the balance in Conservative fund options, for a medium risk return.
Different ULIPs may offer different kinds of premium payment options, most popular ones including limited premium payment and regular premium payment with the flexibility to pay in annual, half yearly, quarterly or monthly modes. You must select a payment type based on your financial niche. A limited premium payment option lets you choose a particular number of years, say 5 or 7, to pay your premiums. Or you can choose a regular payment option where you pay the amount through the entire policy term.
An essential point to remember before investing in ULIP is the calculation of charges that come along with the policy. In its initial stage, ULIP plans often suffer from insufficient perception due to high charges paid in terms of allocation charges, switching charges, administration charges, surrender charges, etc. Accommodate these charges as a part of your expenses and see how comfortable you are with buying a ULIP plan. However, several policies like the Invest 4G by Canara HSBC Life Insurance does not charge several charges like fund switching charges, along with a benefit of return of mortality charges.
An investor’s risk appetite might change with time, therefore consider that you have bought a ULIP plan, you must utilize the feature of fund switching to aim for maximum possible returns. So, if your risk appetite increases considerably due to which you want to switch funds flexibly, this will keep your options open to investing in funds that are likely to get a higher return. Therefore, when you opt for a ULIP plan, note the number of free switches available, cost per switch and the variability of switches that the policy offers you.
A common misconception that exists around ULIPs is that investors must pay a premium amount for only a limited period of time, mostly 5 years, until the lock-in period, which is the reason why many investors choose to take a step back as soon as the lock-in period is over. ULIP plans, however, necessitate a long-term investment horizon to get the desired returns out of it. However, there are several reasons you should not surrender your ULIP policy after the lock-in period. If you surrender the policy beyond the lock-in period, you may end up losing more than invested as the charges cannot get averages in a short-term policy.
Growing your wealth is a priority in order to ensure a secure future for your family, and ULIP plans prove to be a powerful financial product for this purpose. Now that you have the checklist, be aware of the facts before you make an investment and choose your ULIP plan wisely.
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