You must have heard of investment plans from your agent or offered by online insurance platforms, where you can get CRORES with just minimal investment. In the market, it is called a “Unit Linked Insurance Plan” through which you can achieve your dream of becoming a CROREPATI. But, there is a condition that you have to lock your investment for 15-20 years. Usually, it is a 20 year investment plan where you get your money back after 20 years only.
In this post, we will discuss different aspects of unit linked insurance plans and also clear your mind whether you should invest or not?
It may look useful in starting for you, if you are a regular investor in share market and mutual funds, but very helpful for those who are not regular investors and by paying a penny or small amount, they are securing their future.
Understanding ULIP’s definition
ULIP stands for Unit Linked Insurance Plan. It’s a kind of insurance plan that includes both business and insurance parts in one package. In a Unit Linked Insurance Plan (ULIP), the division between insurance and investment is based on the person’s tastes, financial goals, and willingness to take on risk.
However, most ULIPs offer both insurance and investment options. Part of the payment goes towards insurance coverage, and the rest is put in different funds like equity, blue chip funds, debt funds, precious metals, balanced funds etc..
The choice of funds totally depends on you and your service provider. Once you choose while buying ULIP, you cannot change the fund or your portfolio whether it outperforms or underperforms.
| Insurance part: The insurance part of a ULIP means that some of the amount you pay goes towards life insurance. This part of the policy makes sure that if something happens to the insurer during the policy term, the heir will get a certain amount of money, i.e. sum insured. | Investment Part: The rest of the payment is put into different funds, like stock, debt, or balanced funds, depending on the risk tolerance and financial goals of the user. The user can pick the funds and change how they are allocated based on their own tastes and the state of the market. |
Features of ULIP
1. Market Linked Investment Option: Policyholders in ULIPs can choose to invest in a number of different funds, such as stock, debt, or balanced funds. Past returns of a policy does not give a guarantee that the same returns can be received in future.
2. Market Exposure: ULIPs give you access to the stock market and other asset types because they invest in market-linked funds. This puts buyers at risk of market changes and instability, but it also gives them the chance for capital growth and better returns, especially when the economy is growing and the market is doing well.
3. Long-Term View: ULIPs are made for long-term planning of finances and building wealth. It is like planning for the future that aims for the next 20 years. By investing for a long time, you may take advantage of the power of compounding and ride out market downturns, which could lead to higher returns than traditional insurance plans with set returns.
4. Flexibility and Control: Many insurers provide an option to switch between different funds based on the state of the market, their financial goals, and how much risk they are willing to take. This gives investors the freedom to change their investment plan as the market changes, which could help them get the best results over time. But, it is advisable you should have prior knowledge before switching among funds options.
5. Less Payment period: Generally, Unit Linked Insurance Plans provide a payment period of 5-10 years depending upon your investment strategy. You can pay for 5 years in which every month you need to let’s say 5,000 rupees. After the payment period, there will be a lock-in period for 15 years in which you have to watch your investment performance without any further investment.
Pros:
- Investment and insurance combined: Offer potential market-linked returns and life insurance coverage.
- Flexibility: Option to switch between investment funds within the plan.
- Tax benefits: Potential tax exemptions on premiums, maturity proceeds, and death benefits (subject to prevailing tax laws).
- You can plan for your future or child’s future, his/her higher education, marriage or anything else for which might be required a good amount after 20 years.
- You can choose a payment period which may vary from 5-10 years.
Cons:
- Lock-in period: Typically have a lock-in period of 15-20 years, restricting access to invested funds.
- Expenses: May have various charges like premium allocation charges, policy administration fees, and fund management charges, impacting overall returns.
- Complexity: Understanding the intricacies of ULIPs and choosing suitable investment options can be challenging for beginners.
Factors to Consider Before Investing
Your financial planning and investment strategy influence your decision to buy a ULIP or not. I bought a ULIP (Unit Linked Insurance Plan) when I was not an active and regular investor. I was in the learning phase at that time. These factors influenced me to buy a ULIP:
- My child will get 40-45 lakh after 20 year with just investing for 5 years with monthly investment of Rs.5,000
- Past returns were around 20-25%
- Got sum insured amount of Rs.3,00,000 (guarantee amount)
- Compounding interest on investment
- I Intend to save for the long-term which I don’t want to touch with a minimum period of investment.
Factors for you may be different, situations may be different, risk tolerance, financial planning, investment goals, affect your decision. It is advisable to look at all parameters and policy documents before buying a ULIP.
I won’t say it is good or bad as it depends on individual to individual. But, in my opinion, investing in the stock market or mutual funds are better and self-managed options, if you know how to do so. If you don’t want to take pain in learning stock market or mutual fund, you can opt for ULIP where you get better returns compared to traditional insurances.
It is recommended to consider your overall portfolio diversification and if a ULIP complements your existing investments, and carefully review the ULIP product brochure, understand the associated charges, and seek professional advice if needed.
try this calculator: Calculate Interest before Buying Insurance
