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How to choose the right ULIP

You can make your insurance policy work for you, by investing in a Unit Linked Insurance Policy or ULIP. These ULIPs offer a world of benefits and are incredibly useful investment opportunities if used correctly. Like a regular investment plan, you’ll be paying premiums – the only difference here is that a portion of this goes towards satisfying your insurance requirement, and the rest is invested.

ULIPs enable investors to financially secure their families against instability that could arise after the policyholder’s death, and also enable the policyholder to receive regular benefits when he / she is still alive – making the insurance policy work and earn instead of simply parking funds in a traditional insurance plan.

Choosing the right ULIP is important, and in order to choose the right ULIP, one must evaluate his or her own requirements and capacity to handle risk.

How to choose the right ULIP based on capacity to handle risk

Your ability to cope with risk, and understanding that higher risk means higher reward could be a major deciding factor in choosing the right ULIP for you as an individual.

  1. Equity-based ULIPs: These are riskiest investments under ULIPs. But with the high risk also comes the potential for a proportionately higher reward. Investing in an equity-based ULIP is one of the fastest ways to make your idle savings work for you, and one of the most rewarding if everything goes right. But if it goes wrong, your ULIP won’t perform as well as it could.
  2. Debt-based ULIPs: While these investments are far safer than investments in equity-based ULIPs, the rate of return on investment is also proportionally smaller. These invest in corporate bonds, fixed-income instruments, and government bonds. The performance is usually pretty plateaued, and the profit to be made is smaller.
  3. Balanced ULIPs: These are the most flexible kind of ULIP – and puts the power to choose where to invest in the hands of the policyholder. You can switch between where you wish to invest depending on your risk appetite. There are equity and debt funds that these plans invest in, and the rate of investment can also be set by the policyholder.

If your goals are indifferent to risk and reward and the precarious balance between the two, you may prefer to choose the plan you invest in based on the eventual outcome you wish to see. Some people prefer to see their money work for them in different ways, depending on the eventual goal and reason for investment.

How to choose the right ULIP based on your personal investment goals.

  1. To fund your child’s education: This is one of the most popular reasons for choosing a ULIP – as it meets the requirements of securing your dependents against financial instability in the event of your death, and staggers pay-outs in such a way as to be used for a particular purpose. These ULIPs usually pay benefits out once a year, when its needed for the specific purpose for which it was taken.
  2. To build a corpus of funds: Idle savings can be put to work through investment plans, and one that also gives you the option of life insurance cover basically kills two birds with one stone. Instead of navigating the labyrinthine maze of Mutual Fund investments, most people let the insurance company manage their funds and give them a huge pay-out on maturity. Building a huge corpus takes time through the regular hard work method, and ULIPs make the big money dream a reality with minimal direct involvement.
  3. To plan for retirement: One of the scariest thoughts that go through the minds of corporate employees is “What’s going to become of me when this regular monthly income stops?” There are specific ULIP plans designed to take care of you in your twilight years. They offer regular pay-outs after the term of the plan ends, and you can still have the feeling of elation when you receive your monthly salary, only this way you won’t have to go to work for it. Your money will have worked for you.
  4. To meet medical or personal emergencies: There are times in life when huge amounts of funds are required urgently, and there’s no piggy bank to break. Some ULIPs help you meet these expenses by affording you the option of partial withdrawals every so often to help you meet emergency medical expenses, or legal fees, etc. This nullifies the need for a separate health insurance policy, as you get life insurance cover, a well performing investment, and emergency money in case your failing health demands it. Choosing the right plan in this category can help you kill 3 birds with one stone.

While these are the common ways to approach choosing the right ULIP from your world of options, there are also a few things you must remember about ULIPs before signing up for any one in particular.

  1. Insurance versus investment: While ULIPs promise you the world in terms of death benefits and maturity benefits / regular pay-outs, it’s important to remember that traditional term life insurance policies (or pure life insurance policies) always pay out a higher Sum Assured on death, for very low premium (in comparison). If you want the best of both worlds, you’ll have to invest in both worlds. Take a life insurance policy with a huge death benefit for a relatively lower premium, and a ULIP to provide you with a little life cover and a lot of opportunities to grow your idle investments. This way you can really maximize your cover and return on investment.
  2. ULIPs are long term investments: ULIPs, like any other big investment with relatively lower risk, must be thought of in the long-term. Plan for the future you want as the term of the plan decides when you’re going to be paid the big benefit. Sure, you’ll see some returns in the short term, but ULIPs really pay off when you let them work for you and run their entire course.
  3. Hidden charges and tax benefits: ULIPs have a bunch of service charges like premium allocation charges, policy administration charges, fund management charges, and a lot more that don’t make themselves known until you’re presented with the promised amount minus a large chunk that went towards “charges”. This is okay as ULIPs got a lot of flak for this, and have since mended their ways – but it’s still advisable to read before you sign.
  4. Invest across asset classes: Pick the plan that gives you the flexibility to invest across different fund options. Some give you the opportunity to pick between up to 7 or even 8 funds to put your money in, and some have lesser. Once you’ve narrowed your selection down to a handful after considering the above points, pick the one that gives you the greatest flexibility.
  5. Flexibility of policy term: Some ULIPs will pay out when you’re 50, some can give you the benefits in as little as 5 years. Pick the one you want depending on how long, or short, your investment plan is. Bear in mind that longer term investments yield greater results, but if you want money quick, a good short term ULIP may be what you’re looking for.
  6. Death benefit: ULIPs pay out the highest of (up to) three values – the Sum Assured, the Fund Value, or a percentage of the premiums paid up to date. Some ULIPs pay out only fixed Sum Assured, others pay out the higher of only two, and some rare ULIPs pay out the highest of all three amounts. The more number of amounts you have to choose from, the higher your eventual death benefit will be.
  7. Compare: There are a lot of ULIPs out there. Not just the ones your preferred insurer offers you. Compare different ULIPs based on a number of factors and parameters to find the best one for you.

GST of 18% is applicable on life insurance effective from the 1st of July, 2017

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