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A Unit Linked Insurance Policy is a type of combination scheme that provides the benefit of a term insurance along with an opportunity to create wealth via investment. When you pay your premiums for a ULIP plan, a part of it goes towards the term insurance aspect while the other part is invested in equity or debt instruments like mutual funds.First and foremost, you must always know that a ULIP plan has a lock-in period of 5 years, which means that you cannot withdraw your investment before the lock-in period is complete.
ULIP Checklist
Know Your Risk Appetite
In a ULIP plan, you as the investor have the freedom to choose where you want to invest your funds. To make an informed decision in this regard, you must know your risk appetite. You have the option to direct your money into risk-high return equity funds, funds that have lower risks like debt funds, or a combination of both. The policyholder is the one who has to bear the brunt of market volatility when it comes to ULIP plans.Thus, you have to know how much risk you’re willing to take and choose your funds accordingly.
Choose Your Premium Payment Option
Unit Linked Insurance Plan premiums can be paid by two methods, limited premium payment or regular premium payment. A limited payment system means that you can keep your premium paying term for 5 or 7 years while your actual policy term may be 10 years. In a regular payment system, you pay your premiums for the entire policy term. Also, you have the flexibility to choose from monthly, quarterly, half-yearly and annual modes.
Note Down all ULIP Charges
A ULIP plan can have a host of different charges for various functions. So when you plan on buying a ULIP plan, make sure to ask for a list of all charges applicable and go through them carefully. Allocation charges, switching charges, mortality charges, administration charges, surrender charges etc are some of the charges that you may incur in a ULIP. Calculate your returns after deducting the charges and buy your ULIP plan only if you feel that the final figure you’re getting is feasible for your investment.
Never forget that you can always switch funds
If during the policy tenure you feel that the funds you are invested in are not performing well, or your own risk appetite has changed over the years, you have the freedom to switch your funds to a different instrument to aim for higher returns. However, do note that there is a limit to the number of times you can switch for free in a year. Find out the switching costs from AMC and plan accordingly.
Aim for a long term commitment
Many ULIP investors have the habit of discontinuing their policy as soon as the lock-in period of 5 years is over. Also, there is a misconception that you can only pay your premiums for the premium paying term. What one must understand, is that a ULIP must have a long term commitment if one wants to get their desired returns from it. If the policy is discontinued too soon, you may end up facing losses due to the charges, which keep decreasing for as long as the policy is active.
Conclusion
Nowadays you can easily buy ULIP online , but before you take the plunge, make sure you go through the above checklist. It will help you understand how ULIPs work and what things to consider before buying a plan. Go over all the small details of your policy so that you can make the most of your ULIP plan and get the highest returns from it.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.