ULIPs are one of the few plans offering a life cover and more alongside it. It can help you get financial security for the future of your family, as well as financial wellbeing for your future. If you are planning on getting a ULIP, meaning a Unit-linked Insurance Plan, here are a few things you ought to know about them.
- ULIPs are a dual benefit plan
One of the first things you would commonly hear about ULIPs is how they are a single plan offering dual benefits. The first among these dual benefits is life insurance. Having a life cover is a way to protect your loved ones against unforeseen circumstances in the future. It allows you to worry a little less about how your family may cope with financial obligations after you.
The second of these benefits is wealth creation. ULIPs are plans that offer you market-linked wealth creation opportunities. You can use these to grow your wealth over time. This allows you to have a plan for your future along with your loved ones, where you can fulfil all of your dreams from the financial support that comes in the form of ULIP returns. You can use a ULIP returns calculator to understand what sort of returns you can expect from the plan for the premium you pay and the term duration you choose.
- ULIPs come with a lock-in period
Most ULIPs come with a lock-in period of five years. Some plans may also have a lock-in period of seven years. The lock-in period is the initial duration of your ULIP where you will not be able to surrender it. While it is technically possible to surrender your policy during this duration, policyholders are discouraged from doing so. One of the primary reasons behind it is that you will receive the surrender value of the policy only after the end of the lock-in period. Moreover, you will also lose the life cover as soon as you surrender the policy.
- It is deemed to be a long-term plan
An important thing to check before buying a ULIP is whether the plan is aligning with your goals, especially your long-term financial goals. ULIPs, meaning Unit-linked Insurance Plans, are said to be long-term plans that would align well with your long-term goals. These plans work with the power of compounding, i.e., they take your earned interest and reinvest it, thus adding to your principal amount each time. Thus, they are said to work better in the long term rather than the short term. Hence, when buying a ULIP, plan for your long-term future.
- Plans come with fund switching option
The investment aspect of ULIPs offers you a choice of funds to invest in. Most insurance providers will let you choose from equity, debt, and hybrid funds. Of these, equity funds are known to be high-risk and high-yield, whereas debt funds are known to be apt for people with a lower risk appetite and offer relatively slower growth. Depending on how old your policy is, or how close it is to maturity, you can choose to create a balance between the fund choices in a way that is right for you. You may like to build an equity-heavy portfolio in the initial years so that any risk undertaken can later be covered with more reliable debt funds.
- Investments are not without risk
The investments offered by ULIPs are market-linked, and thus, are prone to market vulnerabilities. Before you invest in ULIPs, it is necessary to understand that your wealth creation path may not be steady or consistent. Market-linked products tend to fluctuate. But know that these policies are managed by professional fund managers. You can also use the fund-switching option to minimise your risk and optimise growth.
- There are several charges associated with ULIPs
For the first few years, there may be several charges and fees that will be deducted from your premiums. Some of these charges include:
- Fund management charges
- Mortality charges
- Premium allocation charges
- Policy administration charges
Some of the other charges that may be levied (based on the features of the policy you make use of) include premium discontinuance charges, partial withdrawal charges, premium redirection charges, and so on. You may consult your insurance agent or your insurance provider to know more about which charges will apply to your policy, and how much will you be paying in the form of such fees.
Apart from these things to know before you buy a ULIP plan, remember to browse for plans and choose the one that suits you best. Moreover, try to use online ULIP returns calculators to get a better idea of the returns you can expect from the plan. This will enable you to financially plan and accommodate the ULIP premiums as a regular expense.