A ULIP or a Unit-linked Insurance Plan is a hybrid product which provides insurance and investment to its investors. The policyholder gets financial protection with the insurance cover and at the same time, since a part of the premium paid is channelled into market-linked assets, he gets to save for his long-term goals as well. These long-term goals can be anything from buying a house to funding his children’s education.
Is a ULIP suitable for you?
Although ULIPs sound like a great deal, there are a couple of things you should consider before deciding whether or not ULIPs are suitable for you.
- Combo-approach
Here’s an idea: instead of investing in a ULIP, how about putting your money in a Mutual Fund scheme and at the same time find a suitable life cover via a Term Insurance plan? With the combo-approach, you get better flexibility and control over costs. But this approach has its downsides too, which if not handled properly could get you in trouble. First of all, it isn’t easy for all investors to choose the right Mutual Fund scheme. Most investors stick to the recent performance of schemes and often forget to evaluate other aspects such as its risk-adjusted return. Besides this, when it comes to Mutual Fund schemes, you don’t have to invest on a regular basis. This usually hampers long-term goals as most investors tend to either exit or divert their funds for immediate requirements.
Additional Reading: ULIPs Vs Mutual Funds: What’s the Best Option for You?
When it comes to insurance, if you have fewer dependents, a ULIP might make more sense for you than Term Insurance. This is because, in addition to the life cover, which will take care of your dependents, you can also get some good returns. However, if you have many dependents then Term Insurance should be your go-to plan. So, consider your options carefully before making a decision.
Bottom Line – If you lack proper financial discipline and don’t think that you can manage savings and protection separately, then you should consider investing in a ULIP.
How far is your goal?
If you want to invest in a ULIP, you should aim for a long-term investment. So, make sure that the goals you’re investing for are at least 10 years away. Besides, there are other charges levied on your premium or fund value such as premium allocation charge, administration charge and fund management charge. Also, an early exit is not a good idea when you’ve invested in a ULIP. Unless you invest in a ULIP for a long term, you’ll not be able to garner good returns.
Bottom Line – Even though ULIPs are not flexible, you can switch from one fund to another when a fund within a ULIP is underperforming. So, if your market-linked assets are consistently underperforming, then you have the option to switch to safer funds. ULIPs generally offer 5-6 funds and do not charge for the initial 6 switches or so.
Besides the fact that ULIPs inculcate the habit of saving in investors, they are also beneficial in helping you meet your financial goals (if you invest wisely). In addition, charges have been capped for long-term ULIPs, making it a competitive investment instrument amongst its peer products.
Our advice to you is to weigh your options carefully and do your homework so that you find the most suitable product for you.