Most investors tend to focus a lot of their attention on the investment and wealth creation aspects alone. While it is not a bad idea by any means, life can be very unpredictable. Therefore, it is necessary to account for this unpredictability factor. The best way to do so is by opting for a life insurance plan since it also offers your family the financial protection they need.
This dual need of wealth creation and financial protection is met by a ULIP plan. Ever since ULIP plans appeared, their popularity has grown tremendously. With so many ULIP plans available to choose from, it might be tough for an average investor to choose a suitable ULIP plan in India. If you are in the same boat, here is how you go about choosing a suitable ULIP plan in India.
What is a ULIP plan?
A Unit-Linked Insurance Plan, also known as a ULIP, is essentially a financial instrument that combines the elements and gives an opportunity of both investment and insurance. To put it in a more simple manner, a ULIP investment not only allows you to invest in equity or debt funds (or a combination of both), but also offers you protection through a life insurance cover.
With ULIP investments, you get a variety of funds from which you can choose the fund that you wish to invest in. In addition to that, you can also switch between funds, depending on your needs and requirements.
Such versatility is one of the primary reasons why ULIP plans are often considered to be among one of the preferred investment options available in India to individuals, which can help them achieve their life goals.
How to choose a suitable ULIP plan in India for yourself?
With so many different ULIP plans in the market, you might sometimes find yourself in a tight spot when it comes to choosing a suitable ULIP plan in India. However, these following pointers can help you take the right decision.
1. Take your life goals into account
It is extremely important to align your life goal with the investment option you choose. However, in order to do so, you would have to first identify your life goals you want to achieve. Once you have identified them, you can then choose the ULIP investment plan that matches your life goals.
2. Consider your risk appetite
Your risk appetite has a great influence on the type of investment option that you eventually choose when you purchase a ULIP plan. The combination of funds that you invest in i.e. debt, equity or a combination of both can be selected as per your risk appetite. Equity funds are generally associated as high risk and debt funds are referred to as low risk funds.
3. Consider the fund-switching option
Your risk appetite could change over the years; hence, here is where a ULIP plan comes in handy as it allows you to switch between funds without an additional charge depending on the investment portfolio strategy you have opted for and subject to product terms and conditions.
Things to keep in mind while getting a ULIP plan in India for yourself
Now that you are aware of how to choose a suitable ULIP plan in India, here is a look at some of the other things that you should also keep in mind.
1. The performance of various funds
Assessing the performance of the various funds in a plan is an important step that you should always keep in mind. It gives you deep insights into how the fund has performed in the past, amidst both market uptrends and downsides. While the past performance of a fund may give you a fair idea of the amount of returns that you can expect from it, it is not always a guaranteed indicator of its performance in the future.
2. The life cover of the ULIP investment
When opting for ULIP insurance, it is always a good idea to select a sizable amount of life cover. Choosing a large sum assured as an option available in some ULIPs has the advantage of giving your family a better financial cushion in the event of your untimely demise. So, look at the life cover options available before you make a decision.
3. Check the financial soundness of the insurer
This is something that most investors tend to skip. The financial capability of the insurer is another major factor that you should consider and evaluate. Before investing in a ULIP investment plan, always make sure that you do an in-depth and thorough analysis of the track record of the insurer, including the company’s financial capacity to serve its customers. The claim settlement ratio is another important metric to look into here.
4. Think for the long-term
Although a ULIP plan has a lock-in period of 5 years, it is advisable to stay invested for the long-term instead of withdrawing as soon as the lock-in period is over. This way, you can enjoy the opportunity of wealth creation.
Common ULIP charges you should know about
Another important aspect of purchasing a ULIP plan in India is becoming aware of the ULIP charges involved. Just like other financial products, ULIP plans also have charges associated with them. Since the IRDAI has capped the charges on ULIP plans, the good news is that they are now cost effective for investors like you.
Let us look at some of the main ULIP charges that you should know about before you make your ULIP investment -
• Premium allocation charges
All ULIP charges are charged upfront. In other words, they are charged on the premium upfront. Therefore, when you invest in a Unit Linked Insurance Plan, you will find that the insurance service provider deducts these charges from the premium you pay.
If you are wondering what these charges are levied for, let us get into those details as well. You see premium allocation charges account for the expenses that the insurance company issuing the ULIP incurs initially.
• Mortality charges
You are no doubt aware that in addition to offering market-linked investment opportunities, ULIP plans also provide a life cover. This effectively means that in case of the insured person’s demise, the insurance company compensates the nominees of the policyholder financially, in the form of death benefits. It is in return for providing this cover that insurers levy mortality charges.
These mortality charges vary based on many factors like the age of the life assured. New age ULIP plans often contain clauses that return the mortality charges to the customer when the plan matures. This makes it more cost-effective. So, check if your ULIP scheme has this feature before purchase.
• Fund management charges
ULIP plans invest your money in different kinds of market-linked funds such as equity funds, debt funds. These funds are managed by experts who ensure that your corpus is utilized in the most optimal manner possible, in order to make the most of market movements. For this expertise, fund management charges are levied.
The IRDAI’s guidelines suggest that insurers can levy a maximum of 1.35% of the fund value as fund management charges on an annual basis. These charges are adjusted from the units on a daily basis.
• Policy administration charges
There are a series of activities that need to be performed in order to administer a Unit Linked Insurance Policy. For instance, record keeping, regular paperwork, and policy-linked services are all part of the administration of a ULIP scheme. To cover the expenses associated with these tasks, insurers levy policy administration charges on ULIP plans.
These charges are charged on a monthly basis and they are deducted by redeeming units at the unit price prevailing at the time of such a deduction. These units are redeemed from the policyholder’s unit account.
• Surrender charges
ULIP plans function better as long-term investments. In order to allow investors to enjoy this advantage, ULIP plans come with a lock-in period of 5 years. However, if you wish to surrender your Unit Linked Insurance Plan before the lock-in period is complete, you will be levied surrender charges or discontinuance charges. These charges depend on the year in which you surrender your plan.
When you are choosing a ULIP plan in India for yourself, it is important to keep your life goals in mind and your risk appetite. You could also research or take advice from an expert on the key factors to consider before choosing a ULIP, which can help you make an informed choice.