Points to Consider Before Shopping for ULIPs

Depending on your financial standing and goals, ULIPs can serve as an excellent tool to your family’s financial planning and hence worth considering.

A ULIP (Unit linked Insurance plan) is nothing but a traditional insurance plan with a twist. This one comes with the benefit of investing the premiums that the insured pays, and thus maximising returns on his/her hard earned money.
Hence, a ULIP means getting your life covered plus being able to invest the premiums in a choice of different funds (equity, debt or a mix of both) and therefore building wealth.
As we know, every rose comes with thorns attached, so do ULIPs. We must most definitely consider a few factors before deciding on buying a ULIP. Let us take a look at them now.

  • What’s your risk appetite?

Each person is different regarding risk-taking ability, financial needsisand commitments. Thus, it is essential to fix up your risk level while contemplating on the funds to be invested. Any equity or debt instruments are attached with market risks, and these risks are to be borne wholly by the policy holder. Keeping this in mind, the policy holder can either go into the “Aggressive end” that comprises mainly of equities which have high returns and high risk or chose to be “conservative” by opting for debt instruments that have comparatively low returns and low risk. Anything in-between are known as Hybrid plans composed of both equity and debt to strike a balance between risks and returns.

  • Stiff charges!

All ULIPs come with a levy of charges like administration costs, Premium Allocation Charges (PAC), fund management fees, mortality/surrender charges and switching charges. Earlier, a high mount of the premium paid in the initial years was being eaten up by such charges leaving you with little to invest. But now the IRDA has imposed caps on all these charges to safeguard the interest of the policy holders. Accordingly, one must choose a ULIP after considering all these charges in a way that does not result in an opportunity loss for them.

  • How often do you want to pay premiums?

There are plentiful options to select from, for paying premiums, but again you need to look at the upside and downside of all these options.

  1. Single lump sum payment – can opt to pay the entire premium amount at once as a lump sum if he/she does not have any financial commitments or has enough cash flow to meet contingencies.
  2. Periodical premium payment – premiums can be paid monthly, quarterly semi-annually or annually, depending on your comfort level.
  3. Limited premium payment – under which you can choose to pay premium only for a particular number of years like 3, 5 or 7 years and not upto the policy expiry. Although, you must have clarity on whether the life cover will be extended to you after you stop paying the premium, or not.
  • What will suit you better – Minimum or maximum sum assured?

Many agents would urge you to go in for the plan which offers minimum sum assured to benefit you with a higher amount of investment of your premiums and thus increasing your chances of earning steeper returns. However, if your plan is to be financially helpful to your family in case of death, then it is wiser to choose maximum sum assured so that your corpus does not get affected adversely in times of market volatilities.

  • Flexibility in switching funds

Simply put, this is the ability to jump from fund A to fund B when the market is not seeming conducive with your financial goals. For example, you might have invested more in equity than in debt, and suddenly the share market is crashing, which makes you switch to a fund with more debt than equity. And after some time, when the equity market bounces back with promising returns, you may want to switch back to that fund to maximize your returns. Of course, this jumping/switching funds comes with a levy of switching charge; so you must compare between various ULIP options to see which one has the least such charge. Also, other factors to take note of in this bucket includes a number of free switches and ease of switching.

Bottomline


ULIPs are gaining popularity with a significant momentum these days, unlike earlier when they had a poor reputation due to higher costs. Now with so many options to choose from, depending on your financial standing and goals, ULIPs can serve as an excellent tool to your family’s financial planning.

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