Before you decide to put money in a popular Unit Linked Insurance Plan (ULIP), you must understand the ULIP meaning and how it works. ULIPs have become immensely popular because they offer life insurance coverage and wealth build-up. However, before you can enjoy the plan’s dual benefits, it is vital to invest in the right ULIP.
Below are certain aspects that you must consider before buying the policy.
ULIP fund managers use some of your premiums to invest in different equity, debt, or a combination. Choosing the fund is an essential aspect of investing in a ULIP. As your returns depend on the market’s performance, the investment strategy should match your tenacity for risk. If you are willing to take some risk to earn higher returns, investing in the equity market can help. You can get regular returns at a lower risk with debt or combination funds. Once you can determine your risk appetite, deciding how to distribute the ULIP funds according to your requirements will be easier.
To enjoy the policy’s benefits, you must make the ULIP investment in premiums. Insurers offer three payment options: single premium, limited premium, and regular premium. You have to pay the entire amount for the single premium option. If you choose the limited premium option, the insurer allows you to pay the premiums for a specific number of years, less than the policy tenure. In a regular premium option, you must pay the premiums throughout the plan’s entire term.
Before investing in a ULIP, it is essential to determine its costs. You have to pay premium allocation fees, fund management fees, mortality fees, surrender fees, policy administration fees, and more. The good thing is that the Insurance Regulatory and Development Authority of India (IRDAI) controls these expenses, ensuring the insurer cannot charge you too high. For example, the premium allocation charge initially was 20% per year. It now has a cap of 1.35%, thanks to IRDAI’s regulations. Once you find out the costs, determining the total expenses will be easier.
One of the most significant ULIP benefits is its flexibility. As you know, fund managers allocate your investment in different funds according to your risk-taking capability. However, the policy allows you to switch between funds depending on your changing preferences. For example, if your initial choice was a debt fund, but you now want higher returns, the policy lets you move your investments to equity. However, you can switch for free only a limited number of times; the insurer charges you a switching fee after that. Be aware of these details before investing.
Estimated investment duration
ULIPs come with a lock-in period of five years. However, that does not mean you must withdraw your funds after this tenure. It is necessary to stay invested in a ULIP for a long period to build significant wealth. Hence, it would help if you decided whether you are ready to commit before investing in a ULIP. If you find it difficult to pay premiums after the lock-in tenure, the only option you have is to surrender the ULIP. However, this may prove detrimental, as you may lose more than you had invested. A ULIP investment is a great way to create a substantial corpus. However, consider all these aspects before making the final call. Doing this will help you in making an informed decision.