Among the host of life insurance plans available in the market, ULIP is very popular, and although most people know about its benefits, not many know how to choose the right ULIP. Read on to know about the things to consider while buying the plan.
Today, you may find a sea of information and plenty of advice from various investment experts about choosing the right ULIP (Unit Linked Investment Plan). However, if you are a first-time investor and have no or limited understanding of how the investment plan works, choosing the right one can be difficult. To help you choose the right ULIP and make the most of your investment, we list down a five-point checklist.
- One of the most common misconceptions people have about ULIPs is that all plans have the save investment options and provide the same returns. But, the truth is different fund options, based on the composition of their investments in debt and equity instruments, the returns differ. ULIPs have three types of fund options – debt funds, equity funds, and balanced funds. So, before you pay the premium, you must know if the fund available is in sync with your risk-appetite and choose the right ULIP that provides the best returns in that category.
- When you purchase a ULIP, apart from the premium, you must incur other costs like fund management charges, mortality, and fund allocation charges. While the fund management charges are capped at 1.35%, additional charges levied are at the insurer’s discretion. And, since the ULIPs charges are adjusted against the returns, you must choose a low-cost plan. For example, if you compare two policies, one with a total cost of 1.5% and other with 2.5%, and if the premium for both is Rs. 5000 per month, the former will Rs. 50,000 cheaper over ten years.
- Some unit-linked investment plans offer additional units of investments to the policyholders. For example, some insurance companies add 1% of the annual premium amount to the policyholder’s invested amount, and the bonus may gradually increase to 3% to 7% in the long-run. Whereas, some insurance companies provide additional fund allocation after a certain period of holding the investment. These bonuses and rewards go a long way in building a larger corpus in the long-run. So, when you compare the ULIPs, choose the one that offers better rewards and bonuses.
- Another important factor to consider is the number of times the insurance companies allow you to switch the funds. ULIPs give you the benefit of switching your investment from one fund option to another based on the market condition and your risk appetite. While most ULIPs limit the switching option to four times a year, others allow unlimited switching. The fund switch option gives you a better scope to get higher yields after analysing the existing investment performance.
- Different ULIPs offer different payment options, which means you must consider the frequency of the premium payment. While most insurers in India allow investors in ULIP to pay the premium every month, you can also choose a plan with an annual premium. ULIP plans enable you to pay a one-time premium payment, and you need not pay anything until the end of the policy tenure.
So, based on your preference, you can choose the right ULIP. If you a salaried employee, ULIPs that offer monthly or the annual premium would be the best choice. If you can afford to pay a lump sum amount, a one-time payment option would be ideal.