A Unit-Linked Insurance Plan (ULIP) is an insurance plan, which also allows market-linked returns on investment. ULIPs have really come of age and emerged as a favourite investment option among the millennials. They are low-cost, allow flexibility, offer the best returns, and are tax-exempt. They have all the desirable qualities rolled into a single investment vehicle.
While you are aware of all the qualities of ULIPs, there are chances that distributors and brokers try to misguide you for their own benefit. There are also chances that you get confused among all the different ULIPs offered in the market. The new regulations for ULIP plans have led to a lot of homogeneity in the markets and it may be a little difficult for you to pick the right plan for yourself.
In order to reap maximum ULIP benefits, it is imperative that you do thorough homework and consider various factors before making a choice. Here are some of the key points, which you need to consider while choosing a suitable plan for yourself.
- Choose a plan tailored to your needs
The main component of a ULIP Plan is life insurance. The requirement of life insurance differs across each individual. It depends on factors such as your income level, the tenure of investment, the number of dependents you have, and your age. The most appropriate insurance plan will include each of these factors. Hence, it is important that you get the maximum ULIP returns and the right life cover for yourself.
The main goal of a ULIP plan is to help you to realize your financial goals. So ideally, a ULIP plan you choose should have the flexibility to accommodate the changing events in your life. For instance, when you chose a life cover of INR 10 lakh, your children were small, but as they grow after ten years, your insurance should give you the option to increase the life cover.
- Know the charges associated with the ULIP
Before you invest in a ULIP scheme, it is important that you know about the hidden charges of the ULIP. Amongst the various charges are premium allocation charge, policy administration charges, fund management charge, and mortality charges. There are management expenses associated with every scheme that reduces the long-term wealth creation ability of the scheme. The more you understand the various charges, the better you are placed in terms of transparency.
- 3. Understand the important features of the plan
A ULIP offers you a life cover along with the opportunity of wealth creation. However, to enjoy maximum ULIP returns, you must gain clarity on various benefits offered by the scheme such as ‘fund switch’ (option to switch your money between debt and equity), ’premium redirection’ (option to invest your upcoming premiums in a different fund), ’top-ups,’ and partial withdrawal.
- Analyze the track record
Even though you are well aware of the features and benefits of the policy, it sometimes happens that the maturity payout is not satisfactory. This means that the scheme has not performed well. You must check the track record of the fund before you invest in it.
Specifically, this has to be the long-term performance of the fund, say over a horizon of five-ten years. The changes in ULIP NAV offered by different insurance companies can be accessed through various websites and apps. You can also check whether the ULIP is able to provide you with protection against the downside risks by analyzing ratios such as the maximum drawdown’ and downside capture ratio.
- Claim settlement record
After doing a profound research and comparing various schemes for months, you zero in on a particular scheme. However, all of these efforts will go down the drain if you do not receive the help when needed the most, or your nominee has to do endless rounds for claim settlement. You should look at the claim settlement ratio of the policy over the years to get an idea about what to expect when your turn comes. A simple search through Google will give you the claim settlement ratios for many leading insurance service providers.
- Understanding the investment philosophy
As an investor, it is very important to understand the investment philosophy undertaken by the fund manager and his portfolio construction and stock selection strategy. You can understand this if you read the company’s investment history and background in details. A careful scrutiny of the offer document and prospectus also helps you to know the focus areas of the company, its goals, and risk management capabilities.
- Option to invest across fund classes
You need to select a ULIP that gives you an option to invest across asset classes. The plan that invests across asset classes is a well-diversified one and distributes the risk in a planned way. This way your downside risks are well-protected and you can get better risk-adjusted ULIP returns.
- Switching facility
Always opt for a ULIP, which allows you to switch in between funds anytime you like. This means that if you are not satisfied with the performance of the fund, you can stop investing in that fund. Instead, you can put your money in funds that perform better and are more suited to your financial goals.
- More premium payment options
This is one of the most basic factors while choosing a ULIP. Choose a ULIP, which offers multiple payment options and allows you the freedom of premium payment structure. Ideally, ULIPs should offer you single premium payment, limited premium payment, or regular premium payment options.
Mentioned above are few of the factors, which will guide you to choose the right scheme for yourself. It is very important that you research each plan on your own and take calculated risks. It is best to be realistic and choose a plan that can pay you good returns over the long term.
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