While the purpose and benefits of purchasing a ULIP are known to most people, the choice of investing in the right kind of ULIP is still a matter of concern as most people are unaware of the factors they must take into consideration while buying the plan.
Given the host of information available about investment options, it may not always be possible to choose the right ULIP for adequate coverage and returns. Following are seven points that will help you invest in the right kind of ULIP.
While the purpose and benefits of purchasing a ULIP are known to most people, the choice of investing in the right kind of ULIP is still a matter of concern as most people are unaware of the factors they must take into consideration while buying the plan. Not all ULIPs provide the same kind of returns, nor provide similar quality of services. Those looking to be insured and gain returns from their ULIPs must compare to check if:
• Returns and variety of investment funds available: Different kinds of fund options have different kinds of returns. Not all ULIPs carry the same kinds of investment options. The three basic kinds of funds available are equity funds, debt funds and balanced funds. It is necessary before paying the premium for ULIP to find out if the kind of fund available is in sync with the nature of risk to be undertaken. Once the investor has decided on a type of the fund – he/she should go with the ULIP which has provided the highest return in that fund category.
• Cost of ULIP: A ULIP has various costs like mortality, allocation charges, fund management charge etc. The fund management charges have been capped at 1.35%. Since ULIP charges are adjusted against returns, be careful to choose a ULIP with low cost. For example, consider two plans, one with a total cost of 1.5% and another with a cost of 2.5%. On a premium amount of Rs. 5,000 monthly, the policy with 1.5% cost works out to be roughly Rs. 50,000 cheaper over a period of 10 years.
• Loyalty bonus and additional allocation: Some ULIPs award additional units to policyholders e.g., Edelweiss Tokio Plan-Wealth Plus adds 1 percent of annualized premium to the policyholders’ invested amount. This bonus gradually increases to 3 percent in the 6th year and 7 percent by the 20th year of the policy. Similarly, IPru SmartKid plan by ICICI Prudential gives 0.5% additional allocation on premium after the 6th year. In addition to this ICICI Prudential gives up to 3.5% boost starting from the 10th year. These bonuses go a long way in amassing a large corpus for long-term investors.
• Number of switching options available: A unique advantage provided by most ULIPs is the benefit of switching different fund options depending upon understanding of the market and attitude towards risk. These plans are more lucrative in the sense that they offer greater levels of transparency and flexibility compared to other investment options. Where some ULIPs limit switching options to only four, there are others who allow unlimited number of switching options. The option to switch funds allows the investor greater scope to decide between alternate funds after a detailed examination of the performance of existing investments. Funds need not be transferred completely; insurance companies also allow partial transfer of funds that would enable better yields.
• Premium payment flexibility: Different plans have different premium payment options. The frequency of payment that can be paid by the policyholder also must be taken into account. While some would like to pay annually, there are others who prefer the monthly mode of payment. Still, there are others who look for option of one-time premium payment with no burden thereafter.
Persistence is the key to achieving handsome returns on ULIPs. It is advisable not to surrender the ULIP immediately after completion of maturity or realization of the lock-in period. It is necessary that people realize the value of ULIPs as long-term financial instruments as opposed to putting money in them to attain short-term gains. Moreover, paying premiums of ULIPs ensures the habit of regular and timely savings.The writer is Head of Life Insurance, Policybazaar.com