Are ULIPs Safe To Invest In?

As our lifestyles have improved owing to improvements in society as well as technology, so have our daily expenses. Unit-linked insurance policies allow for each of us to improve our patterns of saving by providing us with a number of benefits.

What is a ULIP?

Unit-linked insurance plans (or ULIPs) allow for policyholders to avail of multiple benefits. Their value lies in providing policyholders with insurance coverage in addition to allowing them to invest their funds under the plan. ULIPs require policyholders to pay a premium. In return, they provide the policyholder with life coverage as well as the opportunity to make investments based on the policyholder’s preference. ULIP investments may be in debt or equity funds or could be balanced between both.

How do ULIPs work –

Companies that provide ULIPs pool all premiums paid by their policyholders and collectively invest this money in a number of funds based on the preferences of policyholders. Once this money is invested in the same, the accumulated investment is split into units each of which is worth a given face value. Each policyholder is then provided with a certain number of units depending on the amount they invested in the ULIP. The value of each unit is referred to as the net asset value (or NAV). Changes in the value of the underlying assets are reflected in the NAV which alters in accordance with changes in the broader assets.

Are ULIPs safe?

Several prospective buyers of ULIPs are often concerned with investing their money in the same for a number of reasons. These include but aren’t limited to worries pertaining to lofty Sensex levels which make them hesitant to enter the market. Market corrections may also add to their fears as they can cause fluctuations in the market and consequently affect ULIP investments. Falls in the market fuel fears of losing money invested in ULIPs.

In order to allay such fears, it is important for all those interested in ULIPs to understand that they allow for switches to be made in ULIP funds. This means that policyholders risk appetite, prevailing market conditions, and their choice govern where their funds are invested. In the event that the equity market isn’t performing to their satisfaction, policyholders can transfer their money to a debt fund. The opposite holds true as well i.e., equity funds can be invested in and money may be transferred from a debt fund to the same should the policyholder think they have a greater potential to maximize their returns.

When designing ULIPs policyholders are encouraged to invest in funds that most align with their long-term financial plans. This helps reduce market risks and allows for the possibility to maximize returns. Policyholders who aim to maximize long-term capital growth may be best suited to invest in equity funds. Those who seek to maximize capital preservation may choose to invest their money in debt funds under the ULIP.

Financial advisors can serve as important guides who can indicate which funds might serve suitable for the policyholder.

Features of ULIP –

Unit-linked insurance plans have a number of features that make them stand out in the market today. Some of these have been mentioned below.

• Long-term policies

ULIPs are one of the preferred instruments for those looking to commit on a long-term basis. As of 2010, ULIPs have a 5-year lock-in period during which premiums are required to be paid. Additionally, policyholders are not permitted to withdraw their money from the plan during this designated timeframe. Prospective buyers should not get dissuaded by this lock-in period as it allows for greater returns to be generated.

• Flexible

ULIPs allow policyholders to customize their plans as per their preferences by awarding them with a significant amount of flexibility. This is apparent in the partial withdrawal feature, permitting of switching funds and premium redirection in addition to several other opportunities. These flexibilities aren’t visible in most other insurance and investment products and ought to be appreciated.

• The transparency provided is top-notch

All charges incurred under a ULIP are clearly outlined by the company providing the plan’s brochure. This ensures that all policyholders are equipped with all pertinent information prior to investing their money and aren’t caught unawares in the future. This level of directness is extremely useful especially since it isn’t always easily found in today’s day and age.

• Goal-based

ULIPs are an extremely useful tool in terms of allowing policyholders to invest their money keeping in mind their financial goals. There exist a number of funds that fall under a given ULIP which cater to the varied investment goals of a given policyholder.

• Dual benefits

By purchasing a ULIP, policyholders avail both financial security in the form of life coverage as well as investment benefits.

Conclusion

Keeping in mind the safety concerns of investors, ULIPs have been designed to allow for switches to be made to debt funds during bearish markets. Bullish markets can prompt policyholders to switch to equity funds.

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