Take care of these 5 things before investing in ULIPs

In recent years, the awareness surrounding investments and wealth creation has been gaining lot of traction, especially among young investors. Today’s youth is more cautious about how they want to invest their money and choose those financial instruments accordingly. Some choose to invest directly in the markets; however, many end up with heavy losses.

Some choose to invest through policies and funds that provide better security for their investment. One such instrument is a ULIP. While ULIPs have been become quite popular among investors, it is prudent that you should be aware of a few things related to ULIPs before investing in it. What are these things? Read on to know more.

What is ULIP?

A ULIP plan is a type of life insurance policy that provides the policyholder with dual benefits of investment and insurance under the same policy. The premiums paid for the policy are used for these purposes. You have the option of investing in either equity funds or debt funds. Equity funds have a high-risk factor, and they provide higher returns. Debt funds have a low-to-medium risk factor, and they provide medium returns.

Life insurance cover is provided to the dependents of the policyholder. If the policyholder passes away during the term of the policy, their dependents will be provided with a death benefit.

What are the things you should be aware about?

When it comes to investing in ULIPs, as a potential investor, you need to keep the following things in mind:

  1. Policy term

The main reason why people invest in ULIPs is to gain good enough amount to fulfil their life goals. For people, life goals can be different. For some it could wanting to buy or build a dream home, planning a trip abroad or saving for medical emergencies. These goals come under the bracket of short-term goals. Planning for your child’s education and marriage, wanting a financially independent retirement come under long-term goals.

When you are aware about your goals, you can plan to invest in ULIPs  of the same duration. If your goals are short-term, opt for short-term policy. However, invest in a long-term policy only if your goals are long-term.

  1. Premiums

It is the premiums paid towards the policy that lets you enjoy the various ULIP benefits. The premium is used for both investment and insurance. When you invest in ULIPs at a young age, the premium is relatively low as compared to investing in it at a later stage of life. ULIPs have a flexible premium payment method. You can either do monthly or yearly premium payments. Or you can do a one-time lump-sum payment as well.

Do keep in mind that the duration of the policy also comes into play. Long-duration policy is much easier on premiums as compared to short-term policy. Other factors such as your age, health condition and income also play a deciding factor.

  1. Charges

There are different types of charges that are levied in ULIPs. These charges are:

  • Fund management charge

A part of the fund that you have invested in is deducted as a charge for managing your fund. If you opt for a fund manager, their charges are deducted from your fund. Once the charge is deducted, the ULIP NAV (net asset value) of your funds is calculated.

  • Premium allocation charge

This charge is deducted from the premiums that you pay for the policy. Charges include covering of the issuing the policy and underwriting.

  • Policy administration charge

The charge includes managing your policy and the paperwork related to it.

  1. Funds

In ULIPs, you have the option of investing in different types of funds. You can invest in equity funds, debt funds, fixed markets and liquid markets. Each type has a different risk factor and offer variating returns. Based on what your risk appetite is and what your requirements are, choose the fund accordingly.

  1. Switching and Top-up

In ULIPs, you have the option of switching or reallocating your investments from one fund to another. For example, if you have invested in equity funds and wish to reallocate a portion to debt funds, you can do so with the help of switching. Similarly, if you want to increase your capital for investment, you can do so by doing a top-up premium. It essentially allows you to do an additional premium payment over your existing premium.

These are some of the things that you need to aware of before you invest in ULIPs. You should get in touch with your financial advisor to know more about ULIP benefits.