Sep 11, 2014,11.08 IST
How to maintain a ULIP after you have bought one
Unit-linked insurance plans or ULIPs offer you the dual benefit of protection and investment. A part of the amount you pay as premium is directed towards providing you life cover while the rest is invested in fund/s with the exception of distribution and management charges. In ULIP, the funds are invested in are equity, debt and hybrid (combination of equity and debt). You can choose the fund option based on the kind of returns you expect and also on your risk appetite.
Considering ULIPs invest in debt and equity instruments, volatile market conditions often cause panic among policy holders forcing them to abandon such policies midway. This is an incorrect approach and also one that will lead to losses. To enjoy the fruits of ULIP, you must have a long-term objective in mind and not make hasty decisions basis market conditions.
Here’s how to maintain a ULIP:
Persist with the plan, don’t look for short-term gains: When it comes to reaping the benefits of ULIP, persistence pays. Some plans offer bonus units either at the time of maturity or after a stipulated period of time. You won’t be eligible for these units if you discontinue servicing your policy during the policy term.
While investing in ULIPs, always have a long-term view in mind and be prepared to stay with such plans for the full course. If you’re looking for short-term returns, there are chances you may be disappointed.
Diversify across funds: One of the major advantages of ULIP is that you can choose the type of fund/s you wish to invest in. It makes sense to diversify your investable amount across debt, equity and hybrid funds. This way, you will be fairly insulated against market volatility. Align your investments in keeping with your financial objective and risk appetite.
Know when to use the option of fund switch and use it wisely: ULIPs give you the option of switching the invested amount between different types of funds so as to help you maximize your returns. This way, you can balance the equity-debt portfolio in a manner such that market volatility does not erode your investments.
However, it is very important to know when to use the option of fund switch. Using it at the wrong time can prove detrimental to your investments.
Don’t surrender ULIPs in haste: In the event of a market crash, don’t surrender your ULIPs in haste. In fact, a market crash is a good time to continue paying premium for a product such as ULIP that promises good returns over the long-term. You can buy more units at a lower net asset value. Once the market recovers and net asset value rises, your fund value will increase, giving you better returns.
Given its twin benefits, ULIP is the ideal choice of those looking for life cover as well as an investment avenue. However, once you a buy a ULIP, make sure that you stick with it right till the end. It is only then that you will be handsomely rewarded. Discontinuance will only cause a dent in your finances and you won’t be able to meet your objectives.
Principal Financial Planner
Optima Money Managers