ULIP is a Unit Linked Insurance Plan. It is an insurance plan that offers a life cover to financially protect your family in case of an unfortunate event with the benefit of investment to fulfil your long-term goals. It is a combination of insurance and investment.
When you invest in ULIP, a part of it contributes to providing life insurance coverage. The remaining is invested in funds of a policyholder’s choice. Here, the insurer covers the life risk, but the policyholder bears the investment risk portfolio.
As mentioned earlier, the Premium amount the policyholder pays to the ULIP plan is divided into two parts. The first part is used to buy life coverage like any life insurance policy, and the other part is invested towards debt, equity or hybrid funds as per the policyholder's choice.
ULIP works akin to mutual funds. It allows policyholders to invest in debt, equities or a combination of the two. Of course, they are bestowed the liberty to choose a plan of their preference and switch between two different ones. Like mutual funds, units are assigned in proportion to the investment. Each unit has a daily NAV (Net Asset Value), which reflects the value of the underlying assets.
Professional fund managers handle unit-linked plans. They study the market movements, invest the funds and make changes as and when required.
After this policy matures, the policyholder will receive the fund value amount, which consists of an aggregate of all investments across all funds. However, in case of a death claim, the death benefit is also added. Regarding fund value, it equals the aggregate worth of all fund units owned at a given point. For example, you may hold 10,000 units. Each unit is valued at ₹15. It only indicates that your fund value calculation will be as follows: 15 x 10,000 = ₹15,000.
At Inbest, we insist all investors keep the following factors in mind when selecting the best ULIP plan to purchase:
Choose a ULIP plan that aligns with your investment goals
When investing in ULIP, you can choose to invest in equity, debt or hybrid funds as per your risk appetite and investment goal in mind. Take, for instance, a hybrid fund. You can choose one to enjoy standardised returns without experiencing massive losses due to market volatility.
Did you know you could switch between various funds to suit your requirements? It’s highly beneficial as you get a chance to leverage market conditions to enjoy satisfactory returns. So, when the market volatility is high, you can invest in low-risk debt funds. Likewise, you can change to equity funds when the market conditions are favourable.
Decide on a certain sum of life insurance cover
ULIP is a life insurance plan. Its objective is to provide life insurance coverage. It helps to fund long-term goals like children's marriage or education. It covers the financial requirements of the beneficiary in case of unfortunate death of the life assured. Hence one should have a clear idea about future needs and opt for a plan that covers them.
Understand the purpose of ULIP plans
As mentioned, ULIP gives the advantages of life risk cover and also helps in the creation of wealth for goal-based planning. ULIPs are structured to help you secure your key goals. It also gives you the added benefit of knowing that your premium is working towards securing your future goals.
ULIPs for Retirement
In this plan, the insured invests while in the earning period, which is gradually collected in a corpus amount. The sum collected is used to pay the insured as annuities post-retirement.
ULIPs for Wealth Creation
This plan is specifically designed to create wealth over a long period. It is especially recommended for young individuals. You can get the flexibility to fund your future financial goals by investing in this plan.
ULIPs for Children’s Education
Parents aim to secure their child's financial future so the child can achieve important milestones. Child insurance ULIP plans are designed to ensure that children's financial needs are met even during the absence of their parents.
Begin early and keep investing
When you start investing early, you get ample time to grow your funds and enjoy better returns. Moreover, over this duration, the risks of short-term volatility in the market, even out. Moreover, since a ULIP is a life insurance policy, starting sooner ensures you have the advantage of life coverage for a longer period. With a long-term ULIP plan, besides returns on maturity, you can enjoy perks like loyalty or wealth boosters to increase your benefits.
Invest regularly
Inbest recommends every individual to invest regularly and consistently. This financial discipline can help you invest a large amount over time, providing greater returns with lesser market vagaries.
Review your portfolio regularly
It is sheerly to keep a tab on investments and optimise returns timely. If you feel a certain plan promises more returns, you can swiftly switch to it.
Explore more about ULIP charges
Before investing in a ULIP plan, consider to learn about ULIP charges. If you choose a plan ignoring the charges, you might have to pay them apart from contributing your premium. Now, ULIP charges can be any of the following:
Mortality Charge
A policy’s mortality charge relies on factors like age, sum assured, tenure and others. It is then applicable to the insurance coverage of the chosen policy.
Premium Allocation Charge
It is a certain percentage that is debited from the premium you pay at the beginning of a year. It covers expenses on intermediary commission and renewal.
Policy Administration Charge
This charge is applicable for the administration of the policy and is charged by the cancellations of units from the chosen funds. It is either imposed as a percentage of your premium or at a fixed rate.
Fund Management Charge
An insurance company levies this charge to handle various funds in the ULIP. It is debited before arriving at the NAV.
Switching Funds Charge
This is the charge for switching between funds. In most ULIP plans, this is free up to a certain number in a year, beyond which it is charged.
Partial Withdrawal Charge
After the completion of the initial lock-in period, partial withdrawals are allowed under the ULIP plan. However, some plans offer unlimited withdrawals, while others have a restricted number of withdrawals. Any withdrawals more than are charged.
Surrender charges
During premature unit encashment, it is levied. It is typically a portion of the fund value. The policy year, when a policy surrenders, influences these charges.
Different ULIP plans have different types of funds with different criteria. You can opt for any or a combination of different types of funds. Some of the common types are-
The best way to recognise these funds is to check where they invest in. If it’s government securities, low-risk income instruments, corporate bonds or other debt instruments, you know these are none other than debt funds. These generate stable and regular income. Debt funds are relatively safe investments. It’s no surprise why they are ideal for conservative investors!
These funds invest in equity and equity-related instruments and hence are highly exposed to market volatility. Persons looking for high capital growth and are willing to take high risk go for this type of fund.
Balanced funds invest in both equities and debt securities. They can generate high returns from a bullish market owing to their equity exposures. However, unlike equity funds, investors are less likely to suffer major losses. This is a good investment option for investors with a moderate risk appetite.
These are also referred to as money market funds as they invest in cash, money market instruments and bank deposits. Therefore, this is also known as money market funds. Only fund managers are experienced enough to handle them, generating higher returns while managing the risk factors through adjustments in lending duration.
It’s no secret by now that ULIPs provide dual coverage and benefits both in terms of insurance and investment. Only a small portion of the premium goes for the life risk cover, and the remaining amount is invested in equity, debt, or a combination of the two.
Makes Saving a Habit
When you regularly put money in a ULIP plan, you're making a disciplined savings habit. By paying regular premiums on time, you can create wealth for yourself while securing the financial future of your loved ones.
Liberty to Decide on a Life Cover
In ULIP, you can choose the amount of Life Cover you want. In most ULIPs, the minimum Life Cover offered is 10 times of annual premium amount. Nonetheless, you can always choose your Life Cover amount as per your policy and insurance company. It could be 40 times your annual premium or a sum more than that.
Flexible Investments
With a ULIP, you can decide the type of fund you wish to invest in. In simple terms, you enjoy complete control over your finances. You can choose to switch between funds. In other words, you get to shift your funds from equity funds to balanced and debt funds. The reverse is also true.
Liquidity
In the ULIP Plan, you get an option called partial withdrawal (with conditions), which allows you to withdraw a part of the money invested in your policy to take care of your immediate expenses.
More Rewards Over Time
The longer you stay invested in your ULIP, the better return you get.
Lock-in period
ULIP policies have a minimum lock-in period, during which funds can't be touched. Even for any emergency, you cannot use this fund.
Market risk
ULIPs allow investments in debt and equity securities, which are exposed to market risks. However, there is hardly an assurance of returns with market conditions influencing investment value.
A few of your insurance needs may remain unfulfilled
For investors desiring a higher degree of insurance coverage, ULIP’s insurance component may be insufficient. During such instances, they would require more insurance coverage since a single ULIP proves inadequate.
At Inbest, we believe in elevating your investment game. Check if your financial profile matches ULIP:
People who enjoy closely tracking their investments
It is none other than investors who can closely monitor their portfolios and switch between funds with varying risk-return profiles.
Long term investors
ULIPs (Unit Insurance Linked Plans) are ideal for individuals who are ready to stay invested for relatively longer periods.
Investors at all life stages
ULIP offers a variety of plans which can be opted for, depending upon the life stage and needs of the investor.
