A life insurance policy is an excellent way for policyholders to ensure that their loved ones are financially cared for after they pass away. Moreover, ULIPs offer the dual benefit of investment and insurance to the policyholders. Keep reading to know more about ULIPs and points to consider before buying this investment-based insurance plan.
ULIP or Unit Linked Insurance Plan is a combination of investment and insurance, requiring the policyholder to deposit one-time, monthly, or an annual premium. A portion of this premium is dedicated to providing life cover, and the rest is invested in the market to earn profits.
While ULIPs are quite popular, they carry some market risks as a portion of the fund is invested in equity or debt instruments. Thus, it is essential to choose a unit-linked insurance plan carefully.
Let’s look at five key factors that you must pay attention to when selecting this insurance plan.
1- Reason for Investing
It is essential to know the reason for buying a unit-linked insurance plan. While the life insurance cover helps the policyholders provide a layer of protection to their family members, the investment portion helps generate returns for the investor. Due to the power of compounding, these plans are known to perform better in the long-term. Knowing your primary reason for investing in a unit-linked plan will help you ascertain the duration you should remain invested and the type of payment option you would opt for. Some common goals are;
- Retirement
- Buying a home
- Child’s education or higher marriage
- Buying a car
2-Reputation of the Insurance Company
With a unit-linked insurance plan, you trust an insurance company with your money for years to come. Thus, it is essential to choose a reliable insurer to ensure it delivers. Check a few parameters to ascertain the reputation of the company;
- Solvency Ratio: While IRDA (Insurance Regulatory Development Authority) mandates all insurers to maintain a solvency ratio of at least 150%, most of them have a much higher ratio indicating a good financial health status.
- Claim Settlement Ratio (CSR): While investment is an integral part of a unit-linked plan, don’t ignore the insurance aspect. CSR is the percentage of claims settled against the claims filed. A high CSR indicates ease of settling claims with the company.
3- Risk Appetite
The investment portion in the unit-linked insurance plan can be invested in equity or debt or both. While equities come with higher return potential, they are also known to carry higher risk. Investment-based insurance plans are market-dependent policies and do not provide the guarantee of fixed returns. It is wise to check the list of funds where the money is invested into to understand if it matches your risk appetite and financial goals. You can view the list of funds on the insurers’ website.
4. Past Performance of the Funds
As mentioned previously, it is essential to check the list of funds where your money is invested in. When checking the fund’s past performance, track at least for 5-10 years to ascertain how the fund has handled different market cycles. This will help you select the best ULIP with a strong track record.
5. Charges and Costs
While ULIPs were initially infamous for being cost-heavy plans, IRDA intervention has ensured that costs such as premium allocation charges have been reduced. However, while selecting a plan, it is essential to pay attention to various costs such as;
- Premium Allocation Charges
- Fund Management Charges
- Administration Charges
- Fund Switching Charges and no of free switches
ULIP is Insurance First Investment Later Plan
While ULIPs offer the dual benefit of protection and investment, always remember insurance is the most important aspect of the plan. Make sure you choose the right coverage and the appropriate payout plan on maturity. Along with this, keep the tips mentioned above in mind to select the best plan.
