Unit-linked Insurance Plans or better known as ULIPs are dynamic and flexible by nature to be fitted to all your needs. Be it Wealth creation, planning for children education/marriage or securing your post retirement years.
This being the most transparent investment options gives you the peace of mind along with providing you an option of customization in the plan chosen.
Why ULIPs are considered to be the most preferred investment option these days:
For being transparent
For allowing customization
Fit to all your requirements
For providing Life cover While creating wealth
How do ULIPs function?
Decide the amount of premium to be paid and the amount of life cover you require.
Some portion of the premium is deducted by the insurer upfront as premium allocation charges.
The rest of the premium amount is invested in the funds chosen by the insured.
Other charges such as admin and mortality charges are deducted on periodic intervals (mostly monthly).
Fund management charges are deducted on a daily basis.
At maturity, you will receive the fund value as at the time of maturity.
Charges incurred in ULIPs:
Premium allocation charges.
FUND Management Charges (FMC).
How to choose our best ULIP plan to gain maximum benefit out of it:
Understand your requirement.
Know your risk appetite (For e.g. If you’ve a high risk appetite, choose for a fund which is more aggressive and invests higher percentage in equities).
Understand the charges levied on your plan as charges varied from product to product.
Compare the past performance of your chosen plan, ensure that you’ve an easy access to your NAV* whenever needed.
Compare the products of different insurance companies to have maximum benefit out of your investments.
Things to keep in mind while opting for a Unit-linked Insurance Plan:
Choose an appropriate life cover wisely keeping your needs and liabilities in mind, your sum assured should be sufficient to take care of all your liabilities in longer term.
It provides you with desirable results only when bought for longer durations as the product charges are higher in the first few years.
Choose your fund options carefully keeping your risk appetite in mind.
Never forget to educate yourself about the charges incurred in ULIPs.
Check for the switching option carefully knowing the number of free switches etc. throughout the policy term.
*NAV is the value of each unit of the fund on a given day.
Know about ULIPs and its charges
Unit Linked insurance plan provides the combination of insurance with investments. It has the double benefit of providing a RISK cover & investing in stock markets. Unlike traditional plans the ULIPS are subject to the risk factors where the risk is borne by the policyholder, the investment risk is related with the stock markets & accordingly the NAVs of the units go up & down depending upon the fund’s performance & the factors affecting the capital market.
Before you invest in ulips check out what all charges ULIPS have. Unless you know about the charges in ULIPS by various insurance companies you would not be able to come to know about your returns in the short as well as in the long run because most of the charges are taken upfront. Thus the basic understanding about the cost structure of ULIPS would help you to know about your returns with complete transparency.
Basic Charges in ULIPs :
1). Premium Allocation Charge: This is a percentage of the premium appropriated towards charges before allocating the units. This percentage is generally higher in the first few years varying greatly from company to company. Say your premium allocation charges are 30%, and then out of your total premium paid of Rs. 1,00,000 Rs. 70,000 are invested in the funds effectively.
2). Mortality Charges: These are the charges to insure you against life cover which depends on no of factors such as age, amount of coverage, state of health etc. If you don’t take a life cover then your mortality charges become zero. As these charges depend upon your age primarily, these charges could be around 1.3 for a 30 year old guy & can extend to 6.4 for a 50 years old guy per Rs. 1000 of the sum assured.
3). Fund Management Charges: These charges are deducted for managing the funds before arriving at the Net Asset Value (NAV). The fee is charged as a percentage of funds under management by the fund mangers. These are ranging from 0.5-2% per annum.
4). Policy/Administration Charges: These are the charges for administration of the plan which could be flat throughout the policy term or vary at a pre-determined rate. These are a monthly fixed amount which varies every year with inflation or as a percentage of sum assured.
5). Surrender Charges: These charges are deducted for premature partial or full encashment of units.
6). Fund Switching Charges: The charges when you wish to switch ULIP options like from Equity to debt. Generally a limited number of switches are allowed without any charge.
Points to be kept in mind :
1). Stay invested for long run: You will get good returns only after 5-8 years of investing therefore its charges should be seen from a long-term perspective as its charges are higher in the first few years which is why it takes more years to get a break even point in investments i.e. your cost will be recovered in a longer period. Your insurance agents might convince you to withdraw the money after 3 years but stay invested for 5-8 years to get good returns.
2). Be clear with the charges: The transparency about charges was not there earlier but now the Insurance Regulatory Development Authority of India has issued guidelines according to which the investors should know all the charges & no hidden charges can be charged.
3). Invest as per your risk profile: You must understand your risk appetite & accordingly allocate assets across different categories. Choose your fund depending upon your age and risk profile.
4). Other features: Apart from the charges you should also look at the flexibility in switching your funds, fund management charges & the funds past performance should also be looked upon before you look out for ULIPS.
Thus ULIPS provide the twin benefit of covering your risks & investing in the stock market. Before you invest in ULIPS you need to take care of the past performances of funds you are investing your money & have transparency about what all charges are deducted from the premium. So be a smart investor & invest according to your risk profile for a long term to get the maximum returns from ULIPS.