The ULIP (Unit Linked Insurance Plan), a hybrid financial product that combines investment and insurance, seems to be the best in terms of both investment and insurance.
Before purchasing, one must consider their needs and priorities in addition to the specifics of ULIPs to determine if this product is suited for them. Each and every financial product in the market is in existence because there are specific needs and several customer personas that need those instruments.
ULIPs are a class of insurance that combines insurance and investing into one package. In these risky, volatile times when nothing is certain, growth with insurance protection is good to go. Although this seems ideal for both insurance and investing, there are several things to take into account before selecting a ULIP as your investment product.
The ULIP calculator is a simple and easy-to-use tool that can be utilised to predict the return you might get.
The primary factor on which experts are unanimous is the time. Only venture out into ULIPs if you have a long-term horizon. ULIPs are worthwhile if the investment horizon is greater than 10 years, but they are not recommended if the investment horizon is shorter, say 3-5 years.
ULIPs work well for individuals with a long-term financial plan of wealth creation and insurance. If you require your investment to be liquid, i.e. they can be easily convertible into cash upon short notice, then a mutual fund is a better option. ULIPs have a lock-in term of a minimum of five years. At this time, you are unable to redeem your money. Naturally, not every mutual fund is liquid. ELSS funds also have a three-year lock-in term. Thus, before deciding to invest in any of the financial goods, be clear about what you want to gain from your money.
A ULIP that is held until maturity is advantageous whether the money is being invested for retirement, a child’s education, or other financial objectives. It provides you with savings potential as well as security in a single plan.
ULIPs are not suited for short-term investments or those who are looking for guaranteed returns. ULIPs are suitable for persons who do not have the time to put in the study that is needed for equities but want the benefit of equities with insurance.
ULIPs are classified into two types: single-pay and regular-pay.
How ULIPs Work
In ULIP investment, a very small amount of the money is invested towards securing your life, and the remaining is invested in equities. When you invest in ULIP, the insurance firm invests a considerable part of the premium in bonds/shares etc., and the balance amount is employed in providing insurance cover.
Charges That May Be Levied By ULIPs
The fine print always has to be reviewed in any financial instrument. ULIPs are no different. Before you commit, please be aware of the fees that your company may charge for your ULIP policy.
- Premium Allocation Charges – There are various jobs that the insurer does, such as underwriting the medical tests, policy, etc. For the same, these charges are applicable.
- Administration Fees – There is a fee associated with administering the policy. This charge is made each month, and it typically remains the same throughout the term or fluctuates at a set rate.
- Fund Management Fees – These get assessed as a proportion of the fund value and are capped by IRDAI at 1.5% annually. These charges go towards managing your finances. It is computed before the NAV calculation. Thus, it won’t be reflected in the net asset value.
- Discontinuation or Surrender Fees – A discontinuation fee is assessed if the ULIP plan is prematurely terminated within the first four years. There are no surrender fees levied after the fifth year.
- Partial Withdrawal Charges – In times of emergency, investors are able to withdraw prematurely from the ULIP plan after the first 3 years. However, early withdrawal entails some fees, as per the terms of the policy.
- Mortality Fees – The insurer assesses these fees in order to provide the insured with passing away insurance.
- Switching Charges – Investors are able to make a change to the fund where their premium gets invested a couple of times each year with no charge. Each switch after the free-limit exhausts is subject to certain fees, depending on the insurance.
To calculate your expected sum assured, make use of the ULIP calculator.