Unit Linked Insurance Plan (ULIP) is a unique two-in-one financial instrument that provides life insurance along with an investment opportunity. When you buy a ULIP, the premiums that you pay are used partly towards providing you with a life cover and partly invested in funds of your choice. They have a lock-in period of 5 years and are structured in a manner that offers tax benefits on multiple levels.
Who should buy a ULIP?
ULIP is structured in a manner that offers goal-based planning. It enables investors to invest their money in a systematic manner where they can achieve their long-term goals with ease be, it accumulates funds for your child’s education, buying a house, or building a retirement corpus. The lock-in period of 5 years ensures investors invest in your ULIP in a disciplined manner. The regular payment of premiums enables a policyholder to invest systematically and generate wealth for the long haul.
Since a ULIP policy offers both investment and insurance, it is essential to know about both aspects before buying one. Most ULIPs provide at least ten times your annual premium of ULIP as a life cover. Some plans offer cover as high as 40 times the annual premium. This ensures that, in case of your sudden demise, there is enough financial cover for your dependents.
For the investment aspect of ULIP, you can choose your ULIP fund allocation based on your risk appetite. If you want to invest in equity-related funds but the risk involved makes you hesitate, ULIP can be a perfect choice. Investing in equity funds through this policy comparatively lowers the risks significantly,then investing in the equity market directly. Investors who stay invested for the long haul saw significant growth in their ULIP performance. Equity funds being directly linked with the market have a high market risk involved. If you are looking for low-risk options, ULIP offers debt funds. The returns are lower than equity funds since debt funds comprise corporate and government bonds. There are also balanced funds where money is partly invested in equity funds and partly in debt funds. They provide moderate returns for the moderate risks involved. Based on the goal that you are planning to invest in, use a ULIP plan calculator that gives you an approximate estimate of the earnings on your investment.
If your risk appetite is low, should you invest in a ULIP?
Risk-averse individuals are often skepticalabout investing money in financial instruments that are linked to equity markets. The ones looking for long-term investments usually prefer to invest a part of their portfolio in equity funds alone. Having a diversified portfolio helps in mitigating the risk related to equity. The advantage of a ULIP performance is that you have a variety of options to choose from for your investment, based on your risk appetite. The policy is also designed in a manner by which you can switch between funds as and when you want. This gives you the option to alter your exposure to equity markets whenever you want. Since ULIPs are directly linked to the market, the option of switching allows you to make the most of the market volatility. Using tools like a ULIP calculator further enables you to make better investment allocation. Several investors prefer to invest their money in equity funds in the initial years of the policy and later shift their allocation to debt funds.
Extremely risk-averse individuals can start investing a major part of their allocation in debt funds, or even all of it. With a ULIP policy, you always have the option of creating a portfolio that is completely free of any equity-based funds. However, since equity funds have been proven to provide huge returns over the long haul, it is advisable to have a mix of both. A healthy debt-to-equity ratio will help to beat inflation easily while providing good returns over the years. Insurance providers also provide a ‘wheel of life’ strategy. Whereas the duration of your policy increases, your portfolio is gradually moved to debt from equity.
You can easily invest in ULIP even if you have a low-risk appetite as there are several safe options to choose from. If you want to maximize your ULIP benefits, it is important to stay invested for the long haul. Also, having a diversified portfolio with a well-spread risk can be a sound investment strategy.