How to Choose the Right ULIP: Tips for Beginners
ULIP, also known as Unit-linked Insurance Plan, is an insurance product providing the advantages of coverage and investment to help you achieve your long-term objectives. There are two components to the premiums paid for a ULIP. A part of your payments goes to purchase life insurance. However, the remaining invests in market-linked funds of your choice to earn profits.
With ULIP, you may secure your loved ones in your absence while reaching your long-term financial objectives. Read more to learn all about how to choose the right ULIP, factors to consider, etc.
Factors to Consider When Choosing a ULIP
With a plethora of options available in the market, choosing the right plan becomes a crucial financial decision. Here are the factors to consider for ULIP selection:
Selecting a sizeable sum insured is ideal, as it can be useful in supporting the policyholder's dependents in the event of their untimely demise.
It is crucial to research the reliability and performance history of the insurance company before choosing a plan.
Choose the assets included in the ULIP based on your risk tolerance. While stocks are appropriate for ambitious investors, debt funds are best suited for risk-averse investors. Investing in a fund that offers debt and equity is a way to adopt a balanced strategy.
Examine the core investment funds included in the plan, considering their objectives and performance records. Remember, the fund’s past performance does not guarantee its future performance.
ULIPs help you make partial withdrawals in times of financial necessity or emergency. However, since many ULIPs have restrictions or minimum withdrawal limits, it is essential to understand the terms and conditions of partial withdrawals.
Defining Your Financial Goals
Financial desires, like purchasing a home, paying your child’s school fees, or retiring comfortably, are the turning points in life. Hence, you need to consider the following aspects when creating ULIP investment strategies and to make your financial goals more achievable:
Wealth building and risk protection are two important facts of financial planning. Fortunately, ULIPs help you solve these issues. While the life insurance coverage ensures your family's economic stability, the market-linked funds can help you grow wealth.
Inflation can affect the most meticulously planned financial objectives. ULIPs offer the potential for better returns than traditional investment avenues by allocating a portion of your investment to the stock market. This guarantees that your money will increase more quickly than the inflationary rate.
Understanding Your Risk Appetite
As ULIPs are market-linked products, understanding your personal risk appetite is paramount to making the right investment choices. Here are some risk factors you should keep in mind before choosing a ULIP:
Changes in the stock market or even interest rates may cause the funds' NAVs to increase or decrease. This is one way that ULIPs differ from other types of insurance. The consumer bears the risk because ULIP performance is market-linked, and there are no guaranteed returns.
ULIPs may occasionally come with extra fees. Premium allocation fees, mortality fees, fund management fees, policy administration fees, partial withdrawal fees, and fund-switching fees are some of the associated charges.
ULIPs come with a lock-in period of 5 years. Depending on the terms and circumstances of certain ULIPs, you may have to incur added costs if you surrender your insurance policy early.
Tips for Maximising ULIP Benefits
Simply investing in a ULIP isn't enough; to truly harness its potential and achieve your financial aspirations, it's crucial to adopt smart strategies. Here are some ULIP tips for beginners to make the most out of the ULIP Investments:
ULIPs are appropriate for long-term investment goals. You can achieve all your goals with their five-year lock-in duration. The power of compounding may be used to build a sizeable corpus by sticking to your investment for ten to fifteen years.
You should know that the features of debt and equity funds are different. When investing in ULIPs, select funds based on your risk tolerance and financial goals.
Stay invested until the end of your ULIP lock-in term. You can not get the entire maturity payment if you take out partial withdrawals before the lock-in period ends. You will also lose out on compounding benefits, a way for investments to expand over time.
To maximise profits and lower exposure to market risks, distribute assets over a variety of asset types in your plan. Finding your existing portfolio's risk-to-return ratio can aid in optimising asset allocation.
Frequently Asked Questions
1. What is a ULIP, and how does it work?
Unit-linked Insurance Plan is a financial instrument that offers both investing and life insurance advantages under one plan. With ULIP, you can contribute to market-linked funds and life insurance policies under a single plan.
2. What should beginners consider when selecting a ULIP?
A beginner should learn basic knowledge about ULIP. They should consider a few key factors before selecting one, including financial goals, fund options, additional charges, and the lock-in period, among others.
3. How can I maximise returns from my ULIP investment?
To maximise your returns, stay invested in the ULIP funds, avoid withdrawals, make timely premium payments, examine your risks, etc.