How long should be the term of your ULIP plan?

Unit-linked insurance plans (or ULIPs) help channelize and maximize your savings over the long term. Buying a ULIP without much inquiry and consideration of the policy tenure, however, may not yield the desired results. For example, a significant number of investors purchase ULIPs for their short- to or medium-term needs, say a few years

Subsequently, there are instances wherein the investors may choose to exit their ULIP plans either before the expiration of the minimum lock-in period or immediately afterward. However, this is not the right strategy.

As a financial instrument, ULIPs offer the flexibility of investments and desired liquidity, so that you may reap policy benefits whenever required while continuing the protection of life insurance cover. Thus, when you decide to terminate your ULIP plan before completion or immediately afterward the minimum lock-in period, the chances are that you may attract a surrender charge, along with various other premium deductions. In other words, ULIPs have low post-cost returns during the initial lock-in period of five years, even though they provide tax saving benefits during this period. Most ULIP plans are designed to deduct the highest amounts from the premium invested as front-end premium allocation charge in the lock-in period. Subsequently, you are likely to get a much lesser amount than that invested because of the loss of premium to cost. At the same time, the surrender charge levied on the ULIP is deducted from the accumulated fund value, further reducing your amount receivable.

The full utilization of ULIP plans can be realized when you decide to remain invested in them for a period of 10 years or more. Also, it is advisable that you maximize the wealth creation potential of your ULIP investment through equity for most portion of your ULIP investment tenure until about three years from maturity. Overall, an extended period of investment is desirable when it comes to ULIP investments, along with a maximal life insurance cover under the plan. Moreover, it is advisable that you remain invested in the all-equity fund option until three to five years from maturity while making partial withdrawals only in case of a financial emergency.