Different from a regular insurance policy a Unit Linked Insurance Plan (ULIPS) gives investors the benefit of both investment and insurance. A part of your investment will go towards insuring your life and the rest will be invested on your behalf in different plans which you choose. Your life cover will depend on the premium which you pay. The primary benefit which it offers is that there is no need to execute the two transactions separately. ULIPS are flexible and dynamic in nature In case of ULIPS you can choose the sum assured at the time of policy inception. Additionally some ULIPs will allow you to increase the sum assured over the term of the plan. It is important that you choose the appropriate ULIP which is in accordance to your financial capabilities.
Choosing the Right Plan
Make sure that you evaluate your risk appetite andfind out what the ULIP offers before you narrow down on a plan. As the investment risk will be borne completely by the policy holder you need to monitor the policy closely and actively. Before you choose an appropriate plan, ascertain your financial commitments, funding needs and risk appetite. The choice of the plan should largely depend on your risk appetite.
Additionally, it is important to understand the charges which are associated with a ULIP. In the first year you may have to pay an overhead charge of 25% to 30% of the premium. The entry load for the fund is around 5% while the policy administration charges is around 1.5%. In case of an eventuality, your family will get the insurance amount. As long as there are funds in your account to pay the premium, your life is covered. But when the unit value falls to an extent that it does not cover the insurance, you may be asked to pay the premium failing which the policy will lapse. Further, the portfolio disclosures are not made regularly and openly as in case of a mutual fund which reduces the transparency quotient of a ULIP.
Deciding on the Financial Goals
If you are looking to invest in a ULIP you should ensure that the goal for which it is used is approximately 10 years away. The charges such as the mortality charges, administration charges and fund management charge are amortized in the initial few years. Thus, an early exit will not favor the investor. As the impact of cost is less in the long term, less charge will eat into your return.
Although a little tricky, a good ULIP plan will yield high returns. An effective plan is one which costs less to give good returns. It should provide adequate life cover and must have proper disclosure with respect to returns and costs in addition to good servicing. Unlike mutual funds ULIPs have a simpler cost structure. ULIPs offer policy holders the flexibility to choose fund options. They come with an in-built range of funds which can range from aggressive to conservative. You can decide which to choose depending on your investment preferences. ULIPs also offer the choice of switching between different fund options so that you can reap the maximum benefits.
Range of Funding Options
The fund options cater to the varied levels of risk appetites. On the aggressive side, the funds are invested mostly in equities which improves returns but increases volatility as well. This requires you to be more careful after the inception of the plan. On the conservative side, the funds are mostly invested in debts and money markets which ensure stable returns and low risk. Depending on your financial capabilities, you can choose to opt for a hybrid plan as well where a portion will be invested in equities and the balance in debts and money market securities.