Anatomy of the Best ULIP

The perfect ULIP should be the ideal combination of insurance and investment. However, what does ideal mean to you? To me, it means…Anatomy of a Perfect ULIPUnit Linked Insurance Plan or ULIP is a popular financial instrument to meet both your insurance and investment needs under a single integrated plan. The most important aspect of a ULIP is that it provides you with the opportunity for wealth creation by taking care of your investment needs and at the same time provides you life cover.

However, with so many options available in the market, selecting the plan that most meets your requirement would require you to do some homework before you make your decision. Some of the key questions you need to answer before making your selection are:

What is your risk appetite?

Every individual is different when it comes to investments, and the choice of investment is largely dependent on the risk appetite, financial needs and commitments. As part of the premium paid towards ULIPs is invested in markets, there are market risks attached to such plans, which need to be borne by the policyholder. Thus, depending on your risk appetite you can choose an equity fund, a debt fund or a balanced fund-which is a mix of both debt and equity.

What is the purpose of buying a ULIP?

ULIPs help achieve long-term investment objectives such as planning to buy a house, children’s education or marriage, or even retirement planning. Though insurance is an important aspect of buying a ULIP, the investment aspect of it can vary from one person to another. The purpose of investment would determine the selection of your plan.

How often do you wish to pay the premium?

When it comes to the payment of premiums in case of a ULIP, you can choose from 3 options:

  • Single premium plan: The entire premium in the beginning as lump sum
  • Limited premium paying plan: You can choose the tenure of policy to any number of years but restrict premium paying term to 5 or 10 years.
  • Regular premium paying plan: You can continue to pay for the entire tenure of the policy.

Depending upon your financial capability and convenience you can choose from any of the three options. In case of the last 2 options, you can choose to pay the premium monthly, semi-annually or annually.

Do you want maximum or minimum cover?

In case of ULIPs, a lower sum assured means higher allocation of premium towards investments thus increasing the probability of higher returns. However, in the event of untimely death, a lower sum assured can leave your loved ones financially vulnerable. Thus, the amount of cover would depend upon your income, expenses, liabilities and number of dependents.

What are the charges you will incur?

Charges take away a huge chunk of premium in case of ULIPs thus lowering the amount available for investment. Though IRDA has put a cap on the premium allocation charges and fund management charges, for higher age people, mortality charges are also very high and you need to check the same.

Depending upon your answers to the above questions, you can choose the perfect plan based on the following factors:

Fund Selection and performance

Selection of funds is one of the most important things when it comes to ULIPs. Select a fund which best meets your risk appetite and investment objective and at the same time has a good past performance. For example, if you are an aggressive investor choose a fund with a proven track record with higher exposure in equity.

The Flexibility of Investment

The performance of ULIPs is majorly dependent on the performance of your funds. Thus, you should choose a plan which provides you with the flexibility to switch from one fund to another depending on the market conditions. Opt for a fund with which allow you maximum free switches. The plan should also be flexible in terms of allowing you to purchase additional units in future in the same asset class if needed.

Cost-effectiveness

There are various charges such as Premium allocation charges, mortality charges, fund management charges, policy administration charges, surrender charges and switching charges which are levied in case of ULIPs. Apart from the fund performance, the returns generated by ULIPs are greatly affected by these charges. Even a small percentage can make a huge difference in the maturity benefits. Hence, compare each and every charge before selecting the plan.

Option to increase life cover

The amount of coverage you take in case of ULIP would depend upon your insurance and investment needs. However, with the passage of time, you may feel the need to go for a higher life cover and so it is very important that you have the option to increase the life cover on your existing policy.

Loyalty Bonus

Look for plans which reward you loyalty bonus or for staying invested for the entire tenure of the policy so as to receive a higher maturity benefit.

Option for partial withdrawal

The selected plan should provide you with the option of partial withdrawal in case of dire need of funds without affecting the other benefits of your plan.

Claim-settlement Ratio

In case of untimely death, all the above benefits would be a waste, if the claim settlement ratio of the insurance company is low as it would create a lot of stress for the nominee later. Hence, select an insurer with high claim settlement ratio and smooth claim settlement process.

ULIPs are excellent investment tools striking a perfect balance between returns and rewards which can help you meet your financial goals with ease. Though they were expensive plans in the past, now they have become affordable and ideal for your long-term investment needs along with the benefit of insurance. They provide you with the flexibility in terms of premium paying term, sum assured and diversification of investments in various funds ranging from debt to equity and meet your financial goals along with the protection of life cover for your loved ones.

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