Investments are a crucial aspect of your financial planning. With the soaring inflation rates, having savings in the bank yielding nominal returns is not enough. This has led to investors searching for financial instruments that offer higher returns. Alongside investments, an individual is also responsible for establishing a financial cover for their loved ones. Life insurance provides the monetary backup in case of the demise of the policyholder. This ensures that in the policyholder’s absence, the life of the loved ones is not affected. One such policy that does both is a Unit Linked Insurance Plan (ULIP).
What is a ULIP?
The meaning of ULIP in simple terms is life insurance that also provides an investment opportunity. Similar to typical life insurance, you pay premiums for your ULIP. However, the allocation in a ULIP works differently. The premium you pay is partially used towards life insurance and partially towards funds in which you choose to invest. This ensures that your family is protected, along with providing returns for the long haul. The insurance component is simple to understand, where, within the duration of your policy in case of your sudden demise, the policyholder will receive the sum assured. For the investment component, there are certain aspects of ULIP that you must know about to make better decisions.
How to invest in a ULIP?
Whenever you are investing in any funds, it is important to research thoroughly before putting your money in. This leaves no room for mistakes and helps you maximize the potential of your investment.
Here are some pointers that will reflect how you should invest in your ULIP:
- Stay for the long haul
Every investment is designed in a manner of either long term, midterm, or short term. For ULIP, its unique format offers a maximum advantage to those users who stay invested in it for the long haul. Over the years, the part of your premium that is invested also starts compounding. Compounding is when, along with your investment, you also start gaining interest in the returns of the prior investments. The longer you stay in a plan, the more you are to benefit from its compounding. ULIP returns in 10 years and above are usually high, considering the returns and the compounding. Compounding enables wealth creation in a ULIP and helps individuals achieve their long-term goals.
- Choose based on your risk appetite
There are several types of ULIPs to choose from, based on your goals. It is important to research before choosing your fund allocation to make the most of the opportunity. You can also use tools like the ULIP return calculator to get an estimate of the returns on your fund allocation. While there are several investment opportunities,they can be broadly categorised, into three types, based on your risk appetite: equity, debt, and balanced funds. You are likely to get high returns if you invest in equity funds. If you have invested in debt funds, you have low returns, but the risk involved is also minimal. For moderate risk, there are balanced funds you can avail yourself of. They comprise both equity and debt instruments, which allow you to balance the risk and reward of your allocation.
- Know the flexibility offered
When you buy a ULIP, the investment allocation that you choose need not be a permanent one. If you are unhappy with the returns that you are making or find your allocation too risky, you can switch your allocation anytime you want. A ULIP allows policyholders to switch their allocation anytime they want. Most policyholders allow free switches two to three times. This ensures that, based on the market volatility and your risk appetite, you can change your allocation to maximize your returns. If you have earned enough ULIP returns in 10 years through equity and your policy is about to mature, you can simply switch to debt. Similarly, if you bought a ULIP and you were afraid to risk your investments during the purchase, you can now switch to equity funds to benefit from the high-risk and high reward practice. It is all up to you as a policyholder to make the most of your investment.
It is important to keep these factors in mind before investing in a ULIP. Research the plans you have shortlisted, compare them, use a ULIP return calculator, and then complete your investment. Also, keep in mind that ULIPs are directly subjected to market risks.