ULIPs are flexible with the dual advantage of investment and insurance, which is unique and can be beneficial if planned properly.
Unit Linked Insurance Plans or ULIPs are the popular financial instruments which include the benefits of both life insurance as well as the investment. Many insurance companies are players in ULIP market and offer benefits through a diverse range of ULIP products. ULIP products are unique in certain ways compared to the other financial products like mutual funds and conventional term insurance with investment options. A mutual fund is a pure investment tool without any life coverage while term insurance with investment options give returns. But these traditional insurance products are typically low-risk investments and the flexibility based on customers’ risk appetite is not fulfilled by these. Moreover, these traditional insurances lock in the fund until maturity.
On the contrary, ULIP has flexibility in terms of selecting the funds from the money market, stocks, bonds and mutual funds to invest. In that way, it caters risk averse as well as risk taker customers. There is flexibility of switching between funds as well. The customers have an option for different premium-payment frequencies. ULIPs provide transparency of features, structures and charges and allows RIDER options for coverage of additional features. ULIP enjoys tax benefits under Sections 80C, 80D and 10D.
Does a Unit Linked Plan suit you?
Some comparable products being available in the market, you need to evaluate whether ULIP is a best suitable product for you. Along with the purpose of life cover, the following criteria help you to decide whether this financial instrument is meant for you.
(1) If you want to invest for medium to long-term period – then ULIP is the choice of investment. These will have a lock-in period of 5 years. So, the medium to long-term investment horizon helps to grow your corpus for some big commitments in life. The transparency of the tool enables to view and compare fund allocation, the Net Asset Value and the total value of the funds. Thus you can be able to select the ULIP that best fits your requirements and expectations.
(2) Your risk appetite and involvement in the funds — some of the most convenient features of Unit Linked Plans are the option to choose the funds and the flexibility to switch the fund options. These together help the investor to optimize their plans as needed throughout the term of the plan. Aggressive investors can select equity funds while conservative customers can opt for money market funds or debt funds. So based on the risk appetite, you can buy the unit linked plan
(3) If you are Hands-on in Investment – Then ULIP is your choice of investment. A close monitoring of your equity funds and calculating the Net Asset Value (NAV) of your investment helps you to optimize your portfolio by switching the funds and availing the best of the market condition.
(4) Consider your stage of life and the financial responsibilities you have – ULIP could be helpful at different stages of life. So evaluate the phase of life and the commitments you have to fulfil as follows:
- If you are young and new in your job, you can choose a policy with low death benefits and choose a fund that is high risk, high return and more aggressive in investment. A close monitoring of the fund performance and required switching will help you in corpus building over the extended period.
- If you are newly married, you can opt for higher death benefit plans with moderately aggressive but balanced funds for wealth maximization
- For a married person with kids, the ULIP should have higher life protection and a balanced approach in wealth creation with close monitoring of the funds
- If you are more settled in life with kids at different phases of growing, you need fund for kids’ education or marriage. You need to invest in a fund with more liquidity and has option for partial withdrawal
- If you are close to the retirement, you can opt for funds with lower death benefits. At this stage, the investment should be more conservative and funds should give moderate but steady returns. No monitoring of NAV should come at this phase
So, a Unit linked plan is very much relevant for people of every age. The flexibility of the instrument combined with the dual benefit of life coverage and customized investment and financial growth can benefit you at every stage of life. A judicious selection of plan considering the charges involved and steady monitoring of NAV with timely fund switching can give you the best outcome of the plan.