Unit Linked Insurance Plans or popularly known as ULIP’s have always faced lot of speculation in the market whether the reason being it’s high commission rates, mis-selling or it being a good investment. ULIP is a combination of insurance and investment. It is a type of a life insurance which allows protection and flexibility in investment. We at Fpguru.com though not big fans of ULIP’s currently offered in the market, would still like to share what should be kept in mind before buying ULIPs.
Just a few tips followed in a proper manner, can make one meet one’s long term financial goals apart from getting an insurance cover.
Charges – Should be Low
IRDA new rules have now come into effect for ULIP policies. Traditionally, initial ULIP premium allocation charges were around 15-20%, but now these charges have come down to less than 9%, some companies are charging 4%. Other charges such as Fund Management Charges are around 1.25- 1.35% approx and Administrative Charge, per month for first few years are NIL and later 0.20-.30% approx. Thus one should first compare the charges of different companies and choose one’s with less charges. This will ensure that more of your money is invested & not going towards various charges.
Lock in period- Investment should be for long-term
Don’t blindly believe insurance agent who tell you to buy a ULIP for 3 years & then withdraw the profits. This is not going to happen as the initial charges will ensure you won’t make any money in first few years. IRDA has also now increased the lock-in period for ULIP from three years to five years. This has made ULIP a good long-term financial product. Since ULIPs are linked to market price of the stocks in which they invest long lock-in period has now provided risk protection. Also one should buy ULIP for a long-term i.e. 15- 20 years. This will protect your funds from temporary market fluctuations.
Sum Assured-Should be high & optimum
The main reason to by life insurance is the Sum Assured. Sum assured is the Death Benefit Amount given to the dependents in case of demise of life assured. Though people buy ULIP’s for investment purposes, the main reason of taking any life insurance is high death benefit. Since ULIP’s are also used as an insurance policy the sum assured should be optimum enough for the dependents. Thus one should always compare the Death benefit offered by the companies as they should not forget that it is also an insurance policy and opt for the one which gives high & optimum death benefit.
Performance of the funds
The return in a ULIP depends on the performance compared to the Benchmark Index (Nifty/Sensex etc.). The investors have an option of investing in various schemes, (diversified equity funds, balanced funds, debt funds etc). It is important to remember that in ULIP’s, the investment risk is borne by the investor because the investor decided in which fund he wants to invest. Thus the policy holder should do the comparison & invest in funds which have performed well and given good returns over a period of time. The best option is to go to the insurer's website and then look for NAV performances.
These points are to be kept in mind before buying these products. ULIP’s per se are not bad products but most ULIP’s currently available don’t score high on any of these points compared to the other products available in the market for investment. ULIP’s though a great concept combining investments & insurance have failed in execution generally. The most important thing to keep in mind before any investment is your financial goal & time horizon. We at Fpguru.com would alternatively suggest you to buy a term plan for your insurance needs & start SIP's for your investments.
By Namrata Shah.
The writer is working with FpGuru.com as a para-planner.
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