Out of the many investment options available for long-term wealth creation, ULIPs occupy a special place in the roster of financial products. Ranging from multiple tax benefits to a life insurance cover, this investment option offers a plethora of benefits to the average investor. If you are wondering what a ULIP policy is, and what the factors that you should consider before investing in one are, here is some in depth information that can help you out.
What is a ULIP?
A Unit Linked Insurance Plan, also known as a ULIP, is an investment vehicle that combines life insurance and investment. By investing in a ULIP, you not only get to create long-term market linked wealth, but also receive a life cover that provides your family with financial protection in the event of your death.
A ULIP policy is one of the most versatile investment options available since it gives you complete freedom to choose and customize the plan according to your financial goals and objectives. Right from the amount of premium and the tenure to the type of fund and sum assured, you could customize a ULIP plan as per the policy terms and conditions to ensure that it is in tune with your life goals and requirements.
Types of ULIP plans in India
Now that you are aware of what a ULIP policy is, let us look at the different types of ULIPs that are available in India.
1. Goal-based ULIPs
These types of ULIP plans are geared towards helping you achieve your life goals and dreams, irrespective of what they may be. Whether your goal is to create long-term wealth, go on an extended vacation with your family, or take care of your child’s future, goal-based ULIPs are designed to help you achieve the same.
2. Retirement-focused ULIPs
If you are an investor who feels that planning for your retirement is the need of the hour and far more crucial, then retirement-focused ULIPs are the right option for you. The investment strategies of such a type of a ULIP investment is geared towards providing you with market linked returns after your retirement, thereby enabling you to live your life on your own terms.
Retirement-focused ULIPs are designed to offer you a steady stream of income by way of systematic partial withdrawals and usually come with whole life insurance covers as well.
Parameters to consider before investing in ULIP plans
With ULIPs, there is a plethora of options to choose from. While having these many options is advantageous to an investor, it can also get quite difficult when it comes to choosing the right plan. Here are some parameters that you should consider and keep in mind before investing in ULIPs –
• Your goals and objectives
Nothing is more crucial than ensuring that the investments that you make align with your goals and objectives in life. In order to do that, you should first be aware of what your goals are. Since your life goals and objectives are what define and shape the trajectory of your investments, always consider them before investing in a ULIP.
Only by putting enough thought into your goals will you be able to ascertain the quantum of investment required and the period within which you would want your goals to be accomplished. For instance, if your life goal is to purchase your own home in 10 years, choosing a ULIP that allows you to achieve that goal becomes easier.
• Your risk tolerance
Not all investments carry the same amount of risk. As far as ULIPs are concerned, this statement could not be truer. Since the funds in a ULIP carry varying levels of risk, knowing your risk appetite becomes essential. This way, you can ensure that your risk tolerance levels and the fund risk matches perfectly.
For instance, equity funds generally carry more risk, whereas debt funds are low risk. On a similar note, a combination of both equity and debt carries a more moderate level of risk. Therefore, knowing your risk tolerance allows you to choose the right kind of funds to invest in.
• ULIP charges
Before you go about investing in a ULIP, it is essential to first take a good, hard look at the various charges that are levied by the insurer. In addition to the standard fund management charges and policy administration charges, there are several other ULIP charges that the insurer levies. This includes premium allocation charges, mortality charges, rider charges, fund switching charges, and top-up charges, to name a few. Since ULIP charges can tend to eat into your final returns, always make sure to check them out thoroughly.
• ULIP fund performance
Another major factor that you should consider before choosing to invest in a ULIP is the fund’s performance and the ULIP NAV over the years. Irrespective of the type of funds that you choose, always make sure to check the performance of at least 5 years. Although past performance does not guarantee future performance, this exercise would give you a fair idea of how the fund and the ULIP NAV has performed during various points in time and under different market conditions.