In the early days of Unit-Linked Insurance Plans (ULIPs), they were quite costly, due to which people were disinterested in investing in these policies. They were expensive because of a variety of ULIP charges. However, after the Insurance Regulatory and Development Authority of India (IRDAI) put a cap on the expenses, ULIPs became a popular choice among investors.
ULIP is one of the best investment options, as it includes many benefits that profit the policyholders in the end. Here, we focus on the functioning of ULIPs and a four-point checklist to consider before purchasing the policy.
How ULIPs work
The Unit-linked Insurance Plan meaning is a policy that offers the dual benefits of life insurance cover and wealth creation. The insurance company divides your premium and invests it in equity, debt, or a combination of multiple fund options. ULIPs allow you to choose the investment avenue depending on your financial targets and risk appetite. You also can switch among funds or create a balanced investment portfolio, depending on your needs.
ULIPs offer various advantages, such as tax-exemptions, fund-switching, partial withdrawal, and flexible investment options. However, before investing your hard-earned money in a ULIP, keep this checklist in mind:
A few ULIP charges determine the total cost of the policy. These expenses include an annual fund management fee of up to 1.50%, mortality cost, policy administration fee, and a premium allocation fee. You must check the last one, especially before buying a ULIP. The premium allocation fee is a brokerage charge, and it can sometimes be on the higher side.
This is why you must inquire about the cost beforehand and avoid any ULIP that charges a premium allocation fee, which is over 5%. You can find a policy with a low fee quickly by comparing different ULIPs online. Some ULIPs do not even charge the premium allocation fee if you pay a premium higher than a specific amount decided by the insurance provider.
There are different types of ULIPs currently available in the market. Almost every insurance company offers ULIPs with multiple investment choices and varied costs. Hence, compare the available policies based on their performances over the last five years or more. This way, you can have a clear idea about which ULIP has the potential to get you the returns that you expect.
As a ULIP policy is essentially a life insurance cover, ensure that you opt for a suitable sum assured. When you are buying a life insurance policy, it must be adequate to cover your dependents’ financial needs in your absence. The sum assured has to be large enough so that your loved ones do not have to sacrifice their dreams.
This is why you must look for a ULIP that offers a substantial life cover. If the sum assured is insufficient, it will only make life difficult for your nominees in case of an unfortunate event.
Switching and asset allocation
You have to be wise about asset allocation to get the best out of your ULIP policy investment. Asset allocation is the process of dividing your capital among equity and debt funds. If you have a significant risk-taking capability, allocating more money to equity funds will earn you higher returns in the long run. Conversely, investing a higher portion in debt funds will keep your money safe, and you will receive steady returns. You have the option to switch among multiple funds if your needs and risk tenacity change. However, ensure to find out how many free switches your insurer permits and what the charges will be if you exceed the limit.
Once you understand this checklist, it will be easier to find the most appropriate ULIP for you and your family.