by ULIP is a financial tool that offers the combined benefits of insurance & wealth growth. An investor should initially choose funds depending on their needs, income, & coverage. Choose the preferred premium paying tenure, i.e. monthly, quarterly, or annually, depending on your comfort. Under ULIP, one part of the premium is allocated towards insurance & the other towards investment. Investments are made in debt funds, equity funds, or balanced funds, depending on the financial objectives, risk tolerance level, investment horizon, etc.
Steps to Choose a ULIP Plan
Once you have understood what is ULIP, let us now understand the steps to choose this plan:
Step 1: Determine your financial objectives
An investor should be clear about their financial objectives, such as a child’s education, marriage, wealth creation, buying a property, retirement, etc.
Step 2: Evaluate your risk appetite
Assess the risk tolerance level to ensure an allocation of the premium amount in the appropriate funds. In case an investor’s profile is low-risk, the funds can be allocated towards debt funds. On the other hand, a larger amount can be deposited in equity funds to get high returns.
Step 3: Compare ULIP charges
Assess the different applicable charges, which include fund management charges, premium allocation charges, administrative charges, etc.
Step 4: Check fund options
Select the funds amongst debt, equity, or balanced funds depending on your risk tolerance level.
Step 5: Check lock-in period
The ULIP comes with a lock-in period of 5 years. Confirm whether it best fits your investment horizon or not.
Step 6: Compare Policies from Different Insurers
As there are different ULIP plans available in the market, they may vary from one another. Hence, to make an informed decision, it becomes mandatory to compare them.
Step 7: Carefully read policy documents
Read through the policy documents carefully for a better understanding of terms & conditions, what is included & what is not.
Step 8: Compare fund performance
Review the past performance of the funds available, but remember the historic performance is not an assurance of future returns.
Step 9: Check out the tax benefits
Check out the tax benefits, which include deduction of tax on the premium amount paid towards the plan u/s 80C of the Income Tax Act, 1961. Additionally, the maturity proceeds are exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
How to Align ULIP with your Life Goals?
A ULIP chosen should well align with the financial objectives to make the most out of it in terms of wealth creation. The following are the ways to align your plan with your life objectives:
- Medium-term goals (5–7 years):
For this duration, one should opt for either debt or balanced funds, i.e., a mix of debt & equity, hence offering moderate growth with stability.
- Long-term goals (10+years):
For this duration, one should opt for equity funds to achieve growth & yield higher returns.
- Child’s education/retirement:
Here, one should invest in combination, i.e. start with investing in an equity fund to yield growth & then when you are near exit, switch to debt funds.
Evaluate Plan Features Before You Invest
While looking for the Best ULIP plan in India, an investor should evaluate the features of the plan:
- Fund performance track record:
Review the past performances of the fund over the last 3-5 years to assess its consistency.
- Policy charges:
Evaluate different associated charges, such as fund management fees, premium allocation fees, etc.
- Lock-in period:
ULIP comes with a lock-in period of 5 years, during which you cannot withdraw funds. Once the lock-in period is over, it is allowed to withdraw funds partially.
- Loyalty additions & return of mortality charges:
Look out for different features, such as loyalty additions, mortality charges, etc.
- Online fund management tools:
Confirm whether your plan offers easy-to-manage online tools for monitoring & switching between the funds.
Eligibility Criteria
Provided are the eligibility criteria to be met for ULIPs, some of which are:
- Age:
The minimum age to enter ULIP is 18 years. The maximum age to enter ULIPs is 6-65 years.
- Premium Needs:
The premium amount varies depending on the type of plan opted for. Under regular premium plans, the premium ranges between INR 12,000 & INR 24,000. Under single premium plans, it involves higher premium amounts.
- Sum Assured:
The sum assured is calculated as a multiple of the annual premium, in accordance with regulatory guidelines.
- Medical Needs:
It requires some medical questionnaires to be submitted, including some medical tests, which depend on the desired coverage amount & age.
Documentation:
It requires documents, such as identity & income proofs.
- Verification:
Confirm the eligibility conditions with the insurance company, since the needs may differ depending on the type of plan chosen.
Common Mistakes to Be Avoided
Provided are some of the common mistakes that should be avoided while choosing a ULIP:
- Ignoring Risk Tolerance
Investors should not make investments without assessing their risk tolerance level. This means don’t invest too much in equities as they are more prone to risks.
- Neglecting the Fund Switching Option
One should not neglect the unique feature of ULIPs, i.e. switching between the funds to rebalance their portfolio to adapt to the changing market situation.
- Assuming Guaranteed Returns
One should not assume a guaranteed flow of returns as ULIPs are market-linked, which involves equities, hence involving risks.
- Discontinuing Premiums Prematurely
One should not discontinue making payments towards the premium amount before the end of the lock-in period. This is because it may lead to forfeiture of insurance coverage & losses due to the applicable penalties & charges.
- Ignoring ULIP Charges
One should not neglect considering applicable charges, such as fund management fees, policy administrative charges, etc., to assess the net returns.
Conclusion
Choosing an appropriate ULIP plan will help an investor align well with their financial objectives, risk tolerance level, & investment horizon. This lets an investor earn maximum returns & achieve their financial objectives within the stipulated time & budget. Also, an investor should ensure that their nominees receive a substantial amount in case of the sudden death of the insured.
Read More:- understanding-your-rights-under-the-ucmj
