Pure life insurance policies are generally not counted among investments as they provide life cover and no market-linked returns. Some traditional endowment plans provide guaranteed maturity benefits, but they are not suitable for someone looking to invest in the markets and create long-term wealth. However, what if there is a plan which gives you life coverage, safeguards your family’s financial future, and also offers the opportunity to invest in market instruments in turn? Yes, we are talking about ULIPs or Unit Linked Insurance Plans.
ULIPs combine insurance and investments to provide a multipurpose, eclectic financial product. It is sought after by investors looking for long-term wealth creation to fulfil their life goals like early retirement or a real estate purchase. However, there are a few common mistakes that we end up making while purchasing these policies. This article will help you learn more about the same.
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How ULIP Works
First, it is vital to understand the working process of a ULIP. Now, the premium you pay is invested in various market-linked funds of your choice after deducting all applicable charges. You also get life coverage up to a certain amount throughout the policy period. For the investment component, you have a diverse pool of funds to choose from, which can be bifurcated into equity, debt, liquid, and hybrid/balanced funds. The type you choose will depend on your specific goals, objectives, and your risk tolerance.
Most insurance companies also allow fund-switching to either maximize their returns during a market boom or lower their risks in case of a lean phase. Fund switching is the ability to change the funds where your money is invested. However, the maximum limit for fund switches varies across insurers. After reaching this limit, the insurer might charge you a nominal fee for switching funds.
Finally, ULIPs have a 5-year lock-in period during which you are not allowed to withdraw from the accumulating corpus. After the end of this lock-in period, you can make partial withdrawals from your fund. This is the primary mechanism behind a ULIP, and you can also track your returns periodically.
Common Mistakes While Buying ULIPs
Unknown to many of us, there is the potential to make several mistakes while purchasing these plans. Here’s looking at some of the common ones:
- Lack of Awareness
Where most people go wrong is that they don’t have deep knowledge about how ULIPs work. Therefore, you should first devote time towards understanding these plans and their salient features. Also, ponder over all the benefits in place. Then make a list of the goals you want to achieve for your future. Now you can make a comparison on whether a ULIP is suitable for you or not.
- Not Considering Associated Costs
ULIP costs usually depend on your coverage amount, tenure, the type of funds chosen for investments, and many other factors. Therefore, you should always use an online calculator to calculate your expected returns and consider the various charges associated with these policies.
- Not Having Appropriate Information
Another mistake happens in perceiving ULIPs as only five-year policies due to their lock-in periods of five years. However, you shouldn’t exit from the plan after your lock-in period. The 5-year period is to ensure that you have liquidity available in case of any emergency. Yet, exiting prematurely from a ULIP may lead to lower returns, and you will only get back a little money after this period, especially if you have invested in equity or other long-term funds. The longer you invest, the higher your returns. That is the thumb rule to be followed.
- Not Selecting the Right Investment Strategy
While buying a ULIP, you have to choose your investment fund type. Are you choosing equity or debt? Are you going for balanced funds? Please do not go for a fund without giving it proper thought. Otherwise, you will ultimately not get good returns on your investment as a result. You should take time to analyse the available funds, their historical performance and returns, and the risk levels. Then, have a fund-switching plan in place as per market conditions and discuss it with your insurance advisor.
These are some of the common mistakes that people make while buying ULIPs. While they are excellent for getting a combination of both insurance and investment returns, a few tiny slips may lead to unwarranted consequences. These include lower returns than desired and the inability to make the most of investment opportunities available in the market.