It is good to make investments in general. Investments are nothing but the distribution of money with an expectation of good returns in future. They help in saving money at right time and help in providing the same money in case of an emergency. Saved money can be used at any point in time for any use. You can use it for expansion of business, building a home, real estates, finance, sales anywhere and at any place. There are varied types of investments in India. To name some are mutual funds, direct equity, pension schemes, provident funds so on and so forth. In this article, we will discuss in depth about Unit Linked Insurance Plan: ULIP.
Investments may help your money to grow over a period of time. This money can help you in crisis or in a new venture depending on the demand of the situation. You can either save up for your older days or for your children’s education. The ULIP investment is the right way to invest your money instead of letting it go here and there.
What is ULIP?
To elaborate, ULIP is Unit Linked Insurance Plan. This is nothing but a combination of investment and insurance policy. The policyholder can decide on paying of the premium. It can be either yearly or monthly depending on the plan chosen by the policyholder. In here, a minor amount of the premium is saved up as secure life insurance and the major is invested like mutual funds. The ULIP can be for 5, 10 or 15 years and the policyholder can keep saving in his desired plan with the following ways. ULIP offers options between equity and debt investment. An investor can choose amongst the one.
Deepak Yohannan, CEO of myinsuranceclub.com, says that if a person has a long-term ULIP, he should go in for a fund option which is equity oriented. This is also called a growth option.
Deepak further says that the current ULIP plan is better than the older ULIP because of its lower charges. Now, you can choose low-cost ULIP plans too. Initially, insurance plans had offered with 4 to 6 percent of returns but ULIP also offers with a double digit in returns when there are investments in equity funds.
In this particular article, we will help you know more about ULIP investment on how to make them and the risk factors to overlook before investing. There are also certain charges for investing in ULIP and you will get all the related information under this article.
How to invest in ULIP?
It is good to make investments. ULIP provides with some good options and when you are looking forward to a long-term investment you can opt for a ULIP it can also get a boost in future. It is important to know the factors required before investing in any plan and here is what you must look out for before investing in ULIP;
1: Make defined goals
It is important to have defined goals before you plan for any investment. Goals may vary from person to person and time to time. Decide if your goals are for a retirement plan or saving for children’s future or getting a new home or are they to create wealth. Having a prescribed goal will help you decide on the investment and will also not disappoint you in future.
2: Know your risk limits
It is important to mark yourself with the risk before investing. This can help you decide your investments. If you can either invest in equity or debt. This can depend on the risk you want to take and know your limit.
Just like we compare the best price to buy an electronic it is important to know the market and compare the rates. Comparing the market will help you get the best deal out of the availability. Keep a check on the performance of the funds to know better. The only criteria in comparison should be the low cost.
4: Know your investment timeframe
Decide on the timeframe of investment. It can vary from 1 year to 5 and 10 years depending upon the type of investment you are making. With this, also decide the amount you are willing to invest. This will help you know your investment timeframe.
5: Re-balance the allocations
Some of the investments provide you with an opinion or re-balancing your allocations as the investor grows older. As the policy nears its maturity, the investor can decide and re-balance his allocations. This is because the risk taking capacity of a person decreases with his or her age.
ULIP offers wealth creation and also protection and this can be a way to invest your money and get safer. ULIP can act as a long term financial investment.
What are the ULIP charges that you must know about before investing?
By far we all have got the basic idea of ULIP plan. It is unlike the traditional plans. The ULIP plan comes with an option to invest between equity or debt and the investor can choose amongst his will and invest orderly. This protects the insurance benefits and also creates the possibility of higher benefits at the maturity of the plan. Now that we know the benefits of investing in ULIP, you must also know about the common charges that ULIP is associated with.
Charges that ULIP is associated with are;
1: Premium allocation charge
The premium allocation charges are deducted from the amount invested and then the remaining amount acts as an investment. They act as distribution fees and also underwriting charges, say the insurance companies. These premium allocation charges tend to be higher during the first two years of the investment.
Say for example: if your premium allocation charges are 4 percent and you invest Rs 1 lakh as ULIP then the company deducts 4 percent of the amount invested that would be Rs. 4,000 and the investment made would be 96,000 with the fund.
2: Fund management charges
As the name suggests, these funds are taken as managing the fund charges. They are charges on the percentage of the asset. These tend to be lower for the debt oriented funds and higher for the equity oriented funds. The IRDAI (Insurance Regulatory and Development Authority of India) has set 1.35 percent as fund management charges. One must also know that as the value of these funds grows over time the fund management charges will also increase.
Say for example: if you invest Rs 50,000 as your fund then as of 1.35 percent Rs 675 is deducted every year. This keeps increasing as the value of funds grows.
3: Policy administration charges
Now like the name suggests, again these charges are deducted against the administration charges. The charges are deducted as administrative expenses. They are taken by the insurance company as maintenance. These charges are deducted monthly from the investor. These are deducted for the paperwork or as sending the reminders to the policyholder on the dates of their premium. The charges depend upon the policy and they remain the same throughout the maturity of the policy. The rate remains as of what it was decided at the time of buying the policy.
4: Mortality charges
Insurance compound of ULIP deduct these charges. They are usually deducted monthly. They are based on factors like the age of policyholder, their total amount of coverage, their health status and so on. The policy document itself includes methodology on calculating these charges.
5: Surrender charges
Partial or full, these charges are encashment units. They must be done on or before the specified date. IRDAI has again set the maximum charges against surrender charges that should be charged by the insurance company. These charges are levied according to the surrender of the policy and the premium to be paid. The surrender charges cannot increase to more than Rs 6000. Surrender the ULIP after 5 years and after the completion of lock in period, then there are no surrender charges taken.
ULIP can be an excellent choice for investment but anyhow, one must understand the details in the policy and also look forward to the investment on a serious note. Go through all the details thoroughly before investing into ULIP.
We have provided you with all the information related to ULIP. A Unit Linked Insurance Plan lets you choose between investment in equity and debt. It also depends on the investment the investor wants to make. It is important to be aware of the investment you are making. Making an investment at the right time will help you get better returns in the future. ULIP will help you get a better income and also help you grow your wealth.
You must choose the ULIP policy according to your investment plans. It is important to secure the future and think about it from today. There is no right time for making an investment. We have provided you with all the information related to the investment under ULIP and now it is up to you to decide and make the investments.