Unit Linked Insurance Plans (ULIPs) are gaining rapid popularity amongst both new and old investors paving its way to give a tough competition to other investment options. What is a Unit Linked Insurance Plan? ULIP is a blend of insurance and investment plans under a single scheme that gives you the benefit of staying insured whilst reaping investment benefits. Now how does it manage to do both at a single time? A part of the premium you pay towards ULIP goes to insurance policy whilst the rest gets invested in various funds like equity, debt, and balanced funds depending on your risk appetite.
The first step you take towards buying a Unit Linked Insurance Plan is deciding the reason to buy one. It is suggested to not invest in a ULIP unless and until you are keen on staying invested for the long term as it reaps benefits in the long term. If you receive ‘X’ rupees after three years, you might receive ‘3X’ after sixteen years. With a wise investment in a ULIP, it can prove to be beneficial to financially back your child’s future education plans. If you are planning to accumulate funds for your post-retirement life, then a ULIP makes a good investment option along with benefits of life insurance plan.
Now that you are all set to choose a Unit Linked Insurance Plan to invest in, here are some points to check for that will help you make the right decision.
- What is your risk appetite?
The investor will have to bear the market volatility risks based on the ULIP investments he/she chooses. Thus, the person needs to set his/her financial commitments and understand his/her risk appetite. People with a high-risk appetite can invest in equity funds. Ones with lower risk appetite can invest in debt funds. There is also an option of balanced funds that comes with a mixture of both funds and carry medium risk.
- What are the premium payment options?
Unit Linked Insurance Plans allow you to choose the way of premium payment based on your financial position. There are three options offered under ULIP premium payment options – single premium payment, limited premium payment and regular premium payment. You can choose an option that allows you to pay all premiums without causing tension on your other expenses.
- What are the ULIP charges?
There is one important thing to pay attention to when you decide to invest in Unit Linked Insurance Plans and that are the extra charges that come with it. Initially, when ULIP was introduced, it wasn’t appreciated due to the high premium charges. But then IRDAI imposed a cap on the fee of 1.35% per annum and its demand spiked.
- How flexible is switching funds?
With time your risk appetite changes too. Thus, ULIPs come with the option of flexible switching of funds. In case your risk appetite increases, you can switch to equity funds, and if your risk appetite decreases, then you can switch to debt or balanced funds easily. However, there is a limit on free switches of funds.
- Are you investing for long-term?
Today almost everyone wants instant results, but when you decide to start investing, you must understand that great returns can only be reaped in long-term investments. Hence, even when the lock-in period of Unit Linked Insurance Plans is five years stay invested for a longer time.