Make 7 Considerations Before Choosing ULIP Plans
It is in our nature to gravitate towards products that offer better advantages when it comes to saving money and making financial decisions. ULIP is a financial product that fits the description perfectly. When you invest in a ULIP, you pay a fixed premium for the amount of coverage you want, and the remaining portion of the premium is invested in a debt or equity instrument.
ULIPs are suitable in this situation because they include several benefits in a single investment while still ensuring significant returns. They have the dual advantage of offering insurance coverage and serving as an investment vehicle, and assisting you in wealth-creation to fulfil financial objectives.
If you are planning to invest in ULIP, you should clearly understand how they function. The ULIP full form is Unit Linked Insurance Plan, and it is a policy that allows you to create an investment portfolio with funds of your choice. When you buy a ULIP plan in India, you can choose between equity, debt, and balanced fund options. Additionally, you have the option of switching between investment funds during the premium payment period.
There are fund managers appointed to your ULIP who are in charge of handling your investments and investing in debt or equity instruments, depending on your fund choice. It is also worth noting that, according to the IRDAI, ULIPs have a 5-year lock-in period, and their success or ability to produce returns is related to the markets.
Here are some of the things you must consider when you buy a ULIP plan in India.
- Risk Appetite
In a ULIP investment, you must be aware of market risk volatility. Before investing in a ULIP scheme, you must first assess your risk appetite and financial obligations in order to be prepared. You can select a suitable fund choice ranging from low to high risk based on your risk appetite.
Funds that are mainly invested in equities, which boost the returns, are usually preferred by people with higher risk tolerance. On the other hand, lower risk fund options, such as market securities and debts, offer consistent returns. You can also invest 40-60% of your money in equities and the rest in cautious fund options for a medium-risk return.
- Premium Payment Option
ULIPs can offer a variety of premium payment options, the most common of which are limited premium payment and regular premium payment, with the option to pay annually, half-yearly, quarterly, or monthly. You must choose a payment method that is appropriate for your financial profile.
A limited premium payment plan allows you to pay your premiums for a certain amount of years, such as 5 or 7. You can also opt for a regular payment option, in which you pay the sum over the course of the policy’s duration.
- ULIP Charges
You must estimate the charges that come with ULIP before making the investment. These charges may be in terms of allocation charges, swapping charges, administration charges, surrender charges, and so on. Include these costs in your budget to see how happy you are with purchasing a ULIP plan.
Since an investor’s risk appetite can change over time, if you have purchased a ULIP plan, you can take advantage of the fund switching function to maximise your returns.
So, if your risk appetite grows to the point that you want to move funds, you will have more opportunities to invest in funds that are more likely to produce a higher return. As a result, when choosing a ULIP plan in India, keep in mind the number of free switches available, the cost per switch, and the switch variability that the policy provides.
- Long Term Commitment
A common misunderstanding regarding ULIPs is that investors must pay a premium for just a certain amount of time, usually five years, before the lock-in period ends, which is why many investors want to exit as soon as the lock-in period ends.
ULIP plans require a long-term investment period to generate the expected returns. However, there are many reasons why you should not surrender your ULIP policy after the lock-in duration has expired. If you forfeit the policy after the lock-in date, you will lose more money than you paid because the short-term policy charges cannot be reversed.
- ULIP Benefit Comparison
Before purchasing ULIP, you should compare all of the options available in the market. The price of the policy should not be the only thing to consider when choosing ULIP. Examine your financial goals and capabilities extensively.
- Tax Benefits
Tax exemptions on the maturity proceeds of ULIPs with an annual premium above Rs. 2.5 lakhs are no longer valid, according to the Union budget 2021-22. Instead, ULIPs acquired after February 1, 2021, will be treated as capital assets, with any earnings and losses treated as capital gains and taxed as such. The insurance factor, on the other hand, is unchanged since the death benefit payable under the ULIP will continue to be tax-free, with no cap on the annual premium.