The financial industry in India has changed a lot over the last few decades. The number of insurance companies, asset management companies and financial institutions in the country have grown exponentially. This means that there are a plethora of investment options available for different types of investors. A Unit Linked Insurance Plan is one such option that offers the benefit of insurance coverage along with investment returns from market-linked securities. A ULIP investment is a lucrative choice for investors with a moderate-to-high risk appetite.
What is a ULIP policy?
A Unit Linked Insurance Plan is a policy that provides customers with the benefit of both insurance coverage and investment. These plans invest a part of the premium payments in market-linked securities, and the other part is used to provide insurance cover to the policyholder. Experienced fund managers handle the investment corpus or ULIP funds, and the investors are provided with different investment options like equity, debt, etc, based on their risk profile. You can opt for a suitable investment plan depending on your financial goals. A ULIP also lets you change your investment portfolio in the middle of the plan.
How to Buy a ULIP?
- Credibility:
It is always advised that you must check the credibility or authenticity of the life insurance provider before investing in a ULIP for achieving your investment goals. Before making the purchase, you should research the financial well-being of the insurance company. An easy way to learn about an insurance company is by checking its solvency ratio. The solvency ratio, which should be 150% or higher, acts as an indicator of whether the insurer will meet its liabilities in extreme situations. You must also check the company’s claim settlement ratio. The claim settlement is the percentage of successful claims settled by an insurer.
- Fund Manager:
ULIPs have a lot of factors that affect them, and one of them is the reliability and market knowledge of the fund manager. ULIPs are long-term investment plans, and investors pick these plans to achieve financial goals like their child’s education, marriage or retirement. However, these plans will help you achieve stable returns if an expert fund manager handles the investments, and there is capital appreciation in market cycles.
- Performance:
You must research the insurance company’s performance and the strategy they follow with their investments. If the company focuses on short-term returns, they may probably take risks, which could hamper your investments. ULIPs are long-term investment products, and the insurer must follow a long-term plan while handling ULIP investments. A simple way to understand an insurer’s performance is by looking at their past performance of about 5-10 years.
- 4. ULIP charges:
When you invest in ULIP funds, you must consider the cost of the policy while purchasing it. The ULIP charges can make a significant difference to the returns you earn through the plan. You must check the charges associated with the plan. Some of the costs associated with ULIPs are:
- Policy administration charge:
It is a charge levied for the administration and management of the policy. It is deducted from the cancellation of units as per the prevailing unit price
- Fund management charge:
These are the charges paid to the fund manager for handling the ULIP investments.
- Mortality charge:
Mortality charges are paid for the underlying insurance cover and are deducted on a monthly basis through the cancellation of units.
- Premium allocation charge:
The insurer levies this charge for the different expenses related to the policy sale like commission, marketing expenses, underwriting expenses, etc.
Through ULIPs, policyholders enjoy the advantage of both long-term investments and insurance coverage. However, since ULIPs are linked to market securities, it is advisable to invest in them according to your risk appetite.
