5 Important factors to consider before purchasing Unit-Linked Insurance Plans (ULIPs)
Everyone should have a financial plan that protects their family in case of their unfortunate and untimely demise. Moreover, they should consider building a wealth portfolio that provides financial stability to their children and spouse. Nowadays, insurance companies offer policies for customers which come with insurance coverage and investment options. They are suitable for those who want to overcome financial constraints during emergencies without any hassles. However, it is wise to make a detailed study of these investment options from various sources to make an informed decision. Not only that, it gives ways to select a plan which suits an investor.
The unit-linked insurance plan provides several advantages to investors by addressing their exact needs. An insurance company will invest the policy premium in different funds based on the choices of a policyholder. It is the best option for those who are looking for long-term financial planning. Before buying the plan, one should know more about what is ULIP from investment experts that will help make the right decision. Moreover, a policyholder can maximise their profits and returns from this plan which gives ways to overcome unwanted problems.
5 Things to keep in mind before investing in ULIP
- Choosing the optimum sum assured amount
- Evaluating the objective of purchasing a ULIP
- ULIP involves various charges
- Knowing the funds associated with money and the risks involved
- Knowing the important terms
1. Choosing the optimum sum assured amount
While buying a ULIP plan, customers should choose the optimum sum assured amount that provides financial security to a nominee. The sum assured amount is a lump sum amount promised by an insurer to the policyholder’s nominee in case of death. Therefore, a policy buyer should opt for a sufficient sum assured amount to take care of his/her family in the event of demise. It is wise to choose a product with a return of mortality charge option which helps a nominee to receive the same when a policyholder passes away. A policy buyer should know the sum assured amounts offered by an insurer to select the right one.
2. Evaluating the objective of purchasing a ULIP
Before purchasing a plan, one should evaluate the objective with more attention. Since it is a long-term investment, a policy buyer should set his/her goals that will help meet exact needs. For example, anyone who wants to lead a comfortable life after their retirement should consider selecting a plan that can accumulate more funds. You receive the amount after the maturity date. Besides that, one can even convert the maturity amount into an annuity based on his/her choices. Similarly, policy buyers can select a plan for their children’s education that will help ensure a bright career.
3. ULIP involves various charges
The ULIP insurance plan involves several charges and policy buyers should know more about them in detail. Knowing these charges and their meaning will help a buyer to select the most suitable policy which caters to his/her requirements. It is wise to gather more details about the charges from different sources before investing money.
- Premium allocation charges: An insurance company will deduct this charge from the premium amount instantly. This charge is mainly meant for recovering the expenses such as investment fees, initial and renewal expenses, and the commission expenses of the intermediary, etc.
- Fund management charges: A fund management charge involves the allocation of money into various investment funds. The fund managers will determine the charges based on the value of assets on a percentage basis. In most cases, a fund manager will deduct the amount before estimating the net asset value (NAV).
- Policy administration charge: An insurance company will deduct the cost of administration and maintenance of a policy under the policy administration charge. Some other charges covered in the plan include partial withdrawal charges, fund switching charges, premium redirection charges, mortality charges, etc. It is advisable to be aware of all of the charges properly before purchasing a plan.
4. Knowing the funds associated with money and the risks involved
A policy buyer should know the types of funds available in a ULIP policy and also the risks involved carefully. This, in turn, gives ways to proceed further enabling him/her to earn more income.
- Equity funds: An equity fund means investing money in stock or equity-related portfolios to generate high returns. On the other hand, the funds are volatile and risky when compared to other funds.
- Income funds: An income fund refers to allocating money in investment plans that ensure a consistent or regular return.
- Debt funds: A debt fund means investing money in government securities, corporate bonds, treasury bills, and other instruments.
5. Knowing the important terms
Investors should know the important terms used in a ULIP insurance plan before investing money. Some of them include life cover, fund-switch, top-up, maturity value, cancellation terms, lock-in period, etc.
A life cover means the sum insured amount received by a nominee when a policyholder passes away due to an accident or medical illness. ULIPs allow investors to switch between various funds depending on their choices. Fund switch is a term used for switching funds according to needs. Similarly, a top-up option allows a policyholder to upgrade his/her benefits. The maturity value is the amount received by policyholders after the duration of a policy gets over. Most ULIPs have a lock-in period and investors cannot withdraw any money or redeem them immediately.
How to buy ULIP plans in India?
Those who want to buy ULIP plans in India should compare the plans offered by insurance companies online. This, in turn, gives ways to accomplish goals in financial planning to ensure peace of mind. Customers can even use a ULIP calculator to determine the returns after maturity. It even gives ways to know the premium amounts while buying a plan.
ULIPs are a great option for those who want to focus on both insurance and investment needs. They also offer tax-saving opportunities to claim deductions that will help save more money. On the other hand, investors should evaluate the risks and insurers’ creditability before purchasing a plan. It is wise for them to know all the variables involved in a plan that will help make a well-informed decision. Not only that, investors can accomplish their goals when they want to grow their wealth.