Planning to buy a ULIP? Here’s what you need to know

Estimated read time 4 min read

When you are creating your portfolio, it is important to choose your investments wisely. A popular product these days in most portfolios is Unit Linked Insurance Plan (ULIPs). What is a ULIP policy? It is an integrated financial instrument that provides you with life insurance, along with the element of investment. The company uses the premiums that you pay partly for securing your life and partly for investing in different funds of your choice. With so many ULIP plans available out there, it is confusing which one to buy.

Here are some key factors that you should consider before you buy a ULIP –

Understand the purpose of buying a ULIP

When you are selecting a ULIP plan, it is important to consider the goal behind your purchase. This ensures that your ULIP plan and your financial goals are well-aligned. Most people treat ULIP as a long-term investment to get a higher sum over a long duration. When you are buying a ULIP, take into consideration the aim behind your purchase. This will also help you understand how to allocate the assets in your ULIP. For example, if you want a ULIP for your retirement corpus, you can buy a long-term plan. This will ensure that around your retirement, your plan will mature, and you will get the sum assured. Whereas, say you are buying a 10-year ULIP and the funds that you get, you want to use for your child’s education. Here, check the ULIP returns in 10 years of the plan that you are buying. This will give you an estimate of the sum you receive after maturity.

Understand the elements of a ULIP

When you buy a ULIP online or offline, there are several insurance and investment terms that you will come across in your policy. You need to be well aware of these terms and what they signify to make a financially sound decision. Understand the meaning of your life cover, policy cancellations term, maturity value, and top-ups. Also, when you buy a policy, know the tenure of your premiums to understand how long you have to pay for it. It is also important to know the lock-in period, as it signifies the minimum time needed for the policy to mature. Knowing these elements of a ULIP beforehand will help you make a well-informed purchase.

The charges you pay for a ULIP

Whenever you buy a financial instrument, it is good to be well aware of beforehand of any charges or costs involved. There are charges you must pay when you purchase a ULIP. You must pay charges (like fund management charges) which reflect the percentage charges for managing your funds. Also, there are premium allocation charges that usually cover expenses involved in policy issuance, underwriting expenses, and distribution fees. There are policy administration charges too that an insurance company charges for admitting and maintaining your policy. Usually, it is cheaper to buy a ULIP online, as it eliminates several offline charges.

Look for the different investment options available

Life insurance plus investment is basically what a ULIP policy is all about. The investment aspect of a ULIP has a variety of options available. You can choose from majorly three types of funds – debt funds, equity funds, and balanced funds. As a ULIP holder, you should know where your money is invested and also the risk involved in those investments. If you are looking for safe options with little to no risks, debt based ULIPs are a plan for you. These funds invest your money in treasury bills, government bonds, or corporate bonds, and usually have a fixed rate of interest. For equity funds, the company directly invests your money in the equity market. They offer huge returns but also have high risks involved. The balance funds play the middle ground where half your money is invested in equity and the other half in debt. Also, it is always advisable to choose a ULIP that allows you to switch between your funds so you can make the most of market volatility.

Along with the above factors, consider the reputation and goodwill of the company from where you are buying a ULIP. With thorough research, you can never go wrong with your investments. It is always good to be thoroughly aware in advance rather than being confused later.

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