Before you decide to put money in a popular Unit Linked Insurance Plan (ULIP), it is crucial that you understand the ULIP meaning and how it works. The reason ULIPs have become immensely popular is that they offer life insurance cover along with 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 a portion of your premiums to invest in different equity, debt, or a combination of both. 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. With debt or combination funds, you can get regular returns at a lower risk. Once you can determine your appetite for risk, it will be easier to decide how to distribute the ULIP funds according to your requirements.
To enjoy the policy’s benefits, you have to make the ULIP investment in the form of premiums. Insurers offer three payment options that are single premium, limited premium, and regular premium. For the single premium option, you have to pay the entire amount upfront. If you choose the limited premium option, the insurer allows you to pay the premiums for a specific number of years, which is less than the policy tenure. In a regular premium option, you have to pay the premiums throughout the plan’s entire term.
Before you invest in a ULIP, it is essential to find out about 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 that 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 about the costs, it will be easier to determine the total expenses.
One of the most significant ULIP benefits is its flexibility. As you already know, fund managers allocate your investment in different funds according to your risk-taking capability. However, the policy offers you the option 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, there are only a limited number of times you can switch for free; 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 have to 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 what 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.