As investors, we constantly strive towards being financially protected while at the same time, investing adequate funds for our future needs. A ULIP or Unit-linked Insurance Plan caters to both – protection and long-term saving.
So, what exactly is a ULIP? It is a market-linked insurance product with dual benefits – Life Insurance and investment. A part of the premium you pay goes into your Life Insurance protection while the rest is invested in market-linked assets for long-term savings.
ULIPs come with various features such as multiple fund options, partial withdrawals, different payment options and modes. These allow you to customise your savings, depending on your financial goals. These goals can be either your kids’ education or marriage, savings for your retirement, or even buying your first house. You can also opt for different policy terms such as single-premium term or limited-premium term. A limited-premium term, for example, allows you to pay premiums for a limited duration (like 3 or 5 years) but the policy term will be longer.
Though an apt financial investment, you need to keep a few things in mind before buying ULIPs. These include the coverage offered by the plan, company’s reputation, flexibility options, your risk appetite, payment options, limitations, and exclusions.
Additional Reading: ULIPs are back with a bang!
Premiums and top-ups in ULIPs
We suggest that you pay your ULIP premiums on a monthly basis. Not only does this average the units cost, it also allows you to master the art of saving. If you have any additional investible income, you can use the top-up option in ULIP to save it. Though the top-up option is charged at 1-2%, they help in increasing your coverage while lowering your average cost. So, basically, you get more units at a lesser cost than buying a new ULIP.
Planning your needs at different life stages
List down your long-term financial goals and estimate the sum needed to fulfil them. Don’t forget to include inflation while estimating the amount. You can use the Human Life Value calculator (mostly available on your insurer’s website) for this. Or you can sit with your insurer’s representative and ask him/her to generate this.
Additional Reading: All About Life Stages And Investments
Use fund options
After deducting the applicable charges, the premium you pay is usually invested in fund options in a ULIP. Most ULIPs come with 5 to 9 fund options. These funds have varying asset allocations between debt and equity. Equity funds could be large-cap or mid-cap funds, while debt fund options could be liquid, long-term or short-term debt funds.
Worried about how to allocate? Worry not! Most ULIPs have asset allocation tools which ensure proper fund investments based on your life stage. Usually, ULIPs allocate more of your premium in equity funds while you’re younger. As you grow older, the focus shifts to debt funds which are less volatile.
A piece of advice – if your goals are long term (say 10 years) then invest in large-cap funds. Why? Because these funds usually invest in established companies, they’re less volatile.
A major pitfall
Fund performance is the biggest drawback of a ULIP. If the fund performs poorly, then an early exit (after the lock-in period of 5 years) will not be fruitful. Don’t want to get into such a situation? Before deciding on a ULIP, carefully evaluate it in terms of features and its fund performance over the years.
A ULIP is a flexible and transparent investment instrument which is perfect for your long-term goals. Invest in a single ULIP and use its features wisely.