Unlike traditional insurance plans, unit-linked insurance plans (ULIPs) are combination policies. These ULIPs combine insurance coverage with investment to provide returns on your money.
Such integrated plans are gaining popularity because of its several benefits, which include versatility, transparency, tax advantages, and affordable charges. Several insurance companies provide ULIPs that cater to the diverse needs of different investors.
Before knowing about how investments in ULIPs work, it will be beneficial to gain a basic understanding of this financial product. A portion of the premium paid is used towards providing life cover. The balance is invested in different financial instruments such as equity, debt, or money market products. Such investing gives you the opportunity to earn certain returns on your investments.
You may choose where you want to invest your money based on some factors such as your age, investment objective, risk appetite, and time period. One huge benefit of a ULIP policy is that you may switch from one financial product to another. Therefore, if you have invested in an equity fund but the market decreases, you may switch to a debt fund to protect your investments from loss. Similarly, as you near the time of achieving your financial objective, you may want to switch from an aggressive equity fund to a debt fund that delivers low but guaranteed returns.
ULIPs come with a minimum lock-in period of five years. However, the maturity tenure of these plans is often longer ranging between ten and 15 years. It is recommended you remain invested until maturity to earn higher returns and accumulate a larger corpus through compounding.
Often, the different fund options provided by the insurance companies while investing in ULIPs may be confusing. Below are the four different types of funds that you may choose to invest the investible component of the ULIP premium:
Such types of funds invest the corpus in public company stocks listed on the equity markets. However, the equity markets are volatile and investing in such funds is very risky. Nonetheless, the potential returns on equity funds are significantly higher than compared to other types of investment products. It is important that you are able to closely monitor the performance of the equity markets. Additionally, you need to be knowledgeable about these markets and its workings to make accurate investment decisions.
The corpus is invested in money-market instruments that deliver low but safe returns. Generally, the money is invested in mutual funds, which provide steady returns with not very high risks. If you are unwilling to assume the higher risk and prefer to invest in safe investments, which provide low-returns, cash funds are an excellent option.
Such funds invest the corpus in high-risk equity instruments as well as low-returns but safer fixed-income securities. This is primarily done to mitigate the risks of equity investments. Therefore, investing in balanced funds has moderate risks.
The money is invested in fixed-income securities and bonds. The portfolio includes unsecured as well as secured instruments in different proportions based on the requirements of the different investors. Typically, the fund corpus is invested in corporate bonds, debt products, government securities, and other similar financial products. These kinds of funds generally provide moderate returns on your investments.
Now that you understand the different funds that you may choose while investing, here are three factors you must remember while choosing between these.
- It is recommended you compare the different products offered by the insurance companies to identify the top performing ULIP funds
- You must understand your requirements to make the right investment decision
- When you invest, it is crucial you link it with a certain financial objective such as children’s education, retirement, or accumulating a corpus to buy a home
When you choose among the different ULIPs, it is important to opt for a product that offers flexibility to switch between funds. Moreover, the chosen plan must provide versatility to select different riders and increase the premium amount if you have a higher investible surplus.
When you opt to switch between funds, it is dependent on two factors as listed below:
- The insurance company may offer either the sum assured or the value of the fund. The mortality charges are calculated as the difference between these two values. Therefore, the life cover depends on the total value of your investment. When you switch during the initial years, it does not significantly affect the insurance coverage. However, it is advisable to switch to bonds as you near maturity to protect your investment from market fluctuations and the uncertainty of the ULIP performance.
- The investment payouts may be separate from the insurance cover. In this instance, the mortality charges depend on the total sum assured that is determined when you purchase the policy. Therefore, the investment does not have any impact on the life cover during the entire duration of the ULIP.
When you invest in ULIPs, you are able to benefit from multiple advantages. However, you need to keep regular track of its performance to make accurate decisions on switching between funds. Although such switching provides versatility, you must keep in mind that insurance companies offer only a certain number of free switches. If you exceed this number, you need to pay additional charges.
While switching, you need to evaluate different factors such as the type of policy, risk involved, and estimated returns, to make the right decisions.