Understand How to Invest in ULIP Plans

Unit Linked Insurance Plans or ULIPs are a unique investment instrument that provides exposure to the debt and equity market while offering life insurance cover to the investor. ULIPs come with a wide array of investment options; it is designed to promote financial independence, retirement planning, and wealth creation. Naturally, ULIPs make for a smart addition to your investment portfolio.

However, if you are hesitant to commit because you don’t know how to invest in ULIP plans, then here’s a look at how ULIPs work.

How Do ULIPs Work?

ULIPs are insurance-based products that are offered by life insurance providers. Like any other insurance plan, you pay monthly, quarterly, or annual premium to buy insurance coverage in your ULIP plan. But the ULIP meaning extends a little further than that. A percentage of your premium is allocated to market investments based on your financial goals.

This allocation buys you fund units that appreciate in value over time and help you create wealth while staying insured. You can choose to manage this allocation yourself using a ULIP return calculator and choose equity funds, debt funds, or hybrid funds to invest in. Alternatively, you can get your insurer’s fund managers track the performance of your investments and whenever required, make the fund switch on your behalf.

What to Consider Before Investing in ULIPs?

There are certain key criteria that you must consider before you begin your investment journey.

Your Financial Goals

Start by defining your financial goals such as buying a house, your children’s education, or having a comfortable retirement. Since ULIPs have a minimum lock-in period of 5 years, during which you have to continue to invest, your financial goals should be mapped around the potential maturity of your policy.

Your Risk Profile

Next, determine your risk-taking ability and the level of exposure that you want to equity markets. A high-risk profile can allow you to allocate more of your investment towards equity and resultantly reap better returns. A low-risk profile would do well with a higher allocation in debt funds.

Expected Rate of Returns

The average expected ULIP returns in 10 years can be around 16%, depending on your fund allocations and market conditions. Before investing in a ULIP plan, compare this rate of return with your financial goals.

Transaction Charges

Actions like premium allocation, mortality change, fund switching, and fund management can attract transaction charges in some ULIP plans. Check for these in your selected ULIP policy so that you are not shocked by the deductions later on.

Market and Product Understanding

Research the product thoroughly and acknowledge your understanding of the market. If you are not good at managing the fund yourself, prepare to opt for an automatic allocation or wheel-of-life fund allocation option for your ULIP plan.

ULIP Investment and Maturity: Things to do

To efficiently manage your ULIP fund allocation, you need to be market-aware and regularly check your fund performance. By switching your fund allocation during market ups and lows, you can avoid risk and maximise your gains. By following these steps, you can effectively manage your ULIP investment and enjoy optimum maturity benefits:

·Keep higher allocation for equity funds during the early years of your ULIP investment and gradually move towards higher debt allocation.

·Check your fund’s performance on a monthly, quarterly, or annual basis to modify your investment strategy. Compare the corpus value to your projected ULIP returns in 10 years to ensure you are on the right track.

·ULIP policies also have a top-up option that allows you to invest more than your premium without affecting your regular premium amount. Use this option to capitalize on market lows and purchase more fund units during a given investment period.

·If you expect a market downturn, switch your units from an equity fund to a debt or liquid fund. As the market returns to normal, switch back to equity funds to make the most of unit value appreciation.

·When nearing maturity or a significant life event when you may want to make withdrawals from your ULIP policy, switch a majority of your investments to debt or liquid funds.

·If your ULIP policy matures during a market low, extend its maturity and only end the policy when your investment has sufficiently recovered.

In conclusion, ULIPs are an incredible investment instrument for long-term financial planning and wealth creation with the added benefit of staying insured. With these tips, you can easily learn how to invest in a ULIP plan and start achieving your financial goals right away.