Unit Linked Insurance Plan, commonly known as ULIP, is one of the popular choices of investors/insurers who want risk cover along with better return on investment. However, many people have also shared their bitter experiences of investing in ULIPs. Let’s try to understand the nitty-gritty of investing in ULIPs so that we can make a better decision while purchasing this innovative insurance plan.
As the name suggests, ULIP is an integrated investment plan which offers the dual benefits of an insurance policy and market-linked investment. In a way, it won’t be wrong to say that ULIP is ‘term insurance + mutual fund’. Like any other insurance plan, there are tax saving benefits associated with ULIPs as well. Further to design ULIPS to suit the varied needs of people, or to attract more investors to be precise – insurance companies have come up with different types of ULIPS such as ULIPs for retirement plan, ULIPs for children education, ULIPs for health solutions among others.
In mutual funds, your money is invested in the debt and equity market in different proportions. The more percentage of your money is invested in the equity market, the more it has the potential to yield with better returns; however the risk is higher. At the same time, the result is the opposite when more percentage of your money is put in the debt market. Same is the case with ULIP if we forget about the insurance part. One may choose a certain fund type out of various fund types with different debt and equity ratios as per one’s needs and risk appetite. Again, there are single payment premium plans and multiple payments premium plans.
If you think ULIP is the best way to get insurance and investment, you might fall under a fallacy. Some investors choose a joint portfolio of ‘mutual fund’ and ‘term insurance’ rather than opting out ULIP. Many people go for traditional guaranteed return insurance plans as well.
There are many attractive advertisements and pushy insurance agents to convince you that ULIPs may double your money in three to five years. If you have the knowledge, no one can misguide you. Make up your mind first, understand the plan well, if it suits your needs, go for it. However, please verify all the hidden charges properly, try to understand the fund management style of the ULIP product, check the reliability of the company and choose the best fund type as per your requirement along with checking the past performance of the fund.
Whether a traditional insurance plan or the combination of term insurance and mutual fund or ULIP or any other investment would be beneficial, depends upon some of the factors as given below:
Position of the stock market when you invest
Allocation of your money (debt vs equity)
Administrative and insurance charges(mortality charges) of the insurance company
Past performance of the fund/fund type
The growth of stock market from the date of your investment till the time you surrender the plan
Hope the next time, you won’t get swayed away by flashy advertisements or manipulative insurance/investment advisors and would be able to take the decisions of your own. But always remember to read the documents properly and understand the allocation of your money to different funds, mortality charges and other administrative charges. Do not forget to follow the capital market and the economy.