Let us understand Unit Linked Insurance Plan meaning first before we delve into the most common mistakes investors make while investing in it.
ULIP is one of the best investment avenues, which maximizes returns on investments besides providing life insurance coverage.
Why should you invest in ULIPs?
If you are wondering why you should invest in ULIP now, understand that it is an excellent way to secure your family’s future financial needs. ULIPs offer numerous benefits like tax saving, flexibility, free switching between funds, and transparency. You may not get all these features in other investment products.
Mistakes to avoid while investing in ULIPs
You should be cautious before investing your hard-earned money in ULIPs. To help you make the most of your investment, refrain from making these errors:
- Selecting the wrong plan
In ULIPs, you can choose among a plethora of plans. Therefore, it becomes essential to opt for the plan according to your long-term financial goals and risk-bearing capacity. You can invest in an equity-focused plan if you want to earn higher returns and are prepared to take a higher risk. If you are not keen on taking a high risk, you can invest in debt funds. Due to a lack of information on ULIP investment plans, many people end up selecting the incorrect fund. Therefore, consult your financial advisor and ascertain which plan suits your needs.
- Considering ULIP as a medium-term investment plan
ULIPs have a lock-in period of five years, but it does not imply that you should surrender your policy at the end of the tenure. Do not consider a ULIP as a five-year investment plan, as it provides better returns in the end. Do not hamper your long-term financial goals by exiting the plan after it completes five years. If you want to capitalize on your investment, stay invested for minimum ten years to earn around 10–12% returns.
- Having misconception about the investment objective
First, determine your purpose of investing in a ULIP. If you consider choosing ULIP only for life insurance, then investing in a term plan is a better option. If you think about ULIP only as an investment tool, then investing in an equity fund can be an ideal choice. If you want to get the dual benefit of insurance and investment under a single roof, opting for a ULIP investment plan is a wise decision.
- Not understanding the costs involved
Before investing in a ULIP policy, it is advisable to have an idea about all the visible and hidden expenses. Always read the fine print of the policy to know about all associated charges.
- Investing in a single premium plan
While investing in a ULIP, you can choose between a single premium plan or a regular investment plan. Opt for a single premium plan only if you are investing in a debt plan. This premium plan does not provide you with tax benefits for many years. Conversely, a regular investment plan has numerous benefits. Here, you can determine the frequency of the payment. You either can pay the premium quarterly, half-yearly, or annually based on your financial position. Besides this, you can reap the tax benefits until you pay the premium every year.
- Not having adequate knowledge of switching plans
ULIPs allow free switching of plans. For instance, if you have invested in an equity-oriented plan, it does not mean that you have to stick with it until the end of the policy tenure. Based on the market’s condition, you can easily switch from one plan to another to avoid risks.
- Considering ULIP as a guaranteed investment tool
This is quite a common misunderstanding among many people. The expected returns from an equity ULIP investment plan are subject to the market’s performance. Investments in an equity-based ULIP are not risk-free, and they do not assure a positive outcome.
Now that misconceptions about ULIP are clear, speak to your financial advisor and research on the most suitable plan based on your financial and risk-taking ability.
