A Unit Linked Insurance Plan, often abbreviated to ULIP, is a composite product. It is an amalgamation of savings and protection instruments. In other words, it offers a life insurance cover along with savings at market-linked rates.
Policybazaar lists down three basic points that investors must consider when looking at an investment in ULIPs.
Check for suitability with regards to goals
ULIP schemes may or may not suit your requirements to meet all your financial goals. Therefore, you must evaluate two important aspects before making an investment in ULIPs.
If you can identify a mutual fund scheme tailored for your goals, and at same time avail the best-suited life insurance cover through a pure term plan, you might not have to invest in ULIPs.
However, as mutual funds do not offer the dual benefits of life protection along with savings, a ULIP fills this gap.
In an ideal scenario, separate investments in mutual fund and life insurance would assist you in enjoying assured protection and good returns. ULIPs are targeted for those who find it difficult to maintain the the equilibrium between multiple investment schemes and products.
While considering the premium paying term and the available plan term don’t forget to have a look at the life cover. ULIPs determine the cover as a multiple of the annual premium. If you are looking for an investment avenue, choose a plan with the lowest Sum Assured because a higher cover means a higher mortality charge. On the contrary, if insurance and investment is your motto, look for a plan which offers a decent coverage multiple.
If you’re seeking to invest in a ULIP, then you must ensure that the goal for which you’re saving, should be at least 10 years away. ULIPs have an entrenched element of insurance, resulting in mortality charges. In addition to this, there are some other charges, which include fund management charge, administration charge and premium allocation charge imposed on the fund value or premium. All the charges levied are refunded over the initial years of the policy. Hence, an early exit is not in your favour.
Check for suitable equity exposure
ULIPs present a wider range of options at your disposal than the conventional life insurance schemes. They come in three major variants depending on how much they allocate to equity with the balance going to debt:
- Conservative ULIPs (invest up to 20% in equities)
- Balanced ULIPs (invest 40-60% in equities)
- Aggressive ULIPs (invest up to 80-100% in equities)
Though this is the key categorisation of the ULIP options, the exact equity/debt distribution may differ across insurance companies. You are given the liberty to choose a variant depending on your risk appetite.
You can switch between the variants of ULIPs defined above to take advantage of investment opportunities across the debt and equity markets. Some insurers may allow you a specific number of free switches.
Switching between the variants also assists you when you need to change your allocation as you approach retirement. At that time, you may want to switch from an Aggressive ULIP to a Balanced ULIP.
Budget for regular payments
Payments towards the ULIP happen on a quarterly, semi-annual or annual basis.
You can also invest a one-time amount in a ULIP scheme either to take maximum advantage of the opportunities available in the stock market and/or if you have an investible financial corpus in a specific year that you wish to keep aside for your future.