A large number of people are joining the ranks of salaried employees. The belief that they can achieve greater financial security by saving for their goals is very common. Even with the trust that mutual funds give them, they think there is more room to earn better returns.
The easiest way to entertain this thought is to invest your money in a direct plan that helps you earn high returns. If you’re also looking for a similar plan, then investing in ULIPs could be the right option for you.
If you want to grow and protect your family’s future while still enjoying access to your money, then Unit Linked Insurance Plan (ULIP) might be the investment option for you. ULIP was launched by UTI (Unit Trust of India) in 1971 and has grown steadily since then.
Moreover, we all know how the ULIP makes a lot of sense as an investment. However, its complexity and the lack of understanding of the underlying asset class had been its constraints for the general public.
However, an improved understanding of ULIPs and their asset class together with enhanced product offerings has led to the surge in the popularity of such plans as a preferred option for investments.
Table of Contents
What is ULIP?
ULIPs are an investment as well as an insurance product, where the policy provides life insurance coverage as well as the opportunity to invest in various funds. These include equity funds, debt funds, and a combination of both.
Flexible Investment Benefits in ULIPs
- Shift Between Fund Options
Unit-Linked Insurance Plans can be equipped with an option called fund switching, which gives investors flexibility by allowing them to choose from a variety of investment funds, including both debt and equity funds or a combination of both.
When a policyholder invests in a ULIP, they can opt to move their money from one fund to another. This process is completely dependent on the investor’s appetite for risk—which is to say, the magnitude of risk the investor feels comfortable taking.
Over a long-term period, investors may choose to take more risks by investing in an equity fund earlier and later shifting to a debt fund as the maturity nears. This is often referred to as ‘Years to Maturity’ based portfolio management.
- Partial Withdrawals Facility
ULIPS also features a withdrawal option that provides policyholders with access to some of their own accumulated Fund Value before the policy expires. This comes in handy when you need money—say, to pay for an unforeseen medical expense.
However, you can only withdraw the entire amount upon maturity of the policy. This feature is available only after five years of the inception of the policy. It also applies to both the base policy as well as any top-ups you’ve added to it.
Other rules apply to withdrawals. Firstly, if you have invested in an investment-linked pension plan, then you cannot make withdrawals from it. Moreover, in case a plan covers minors, the withdrawals can be only made when the child turns 18.
- Tailored Options
Certain plans allow investors to choose the type of investment offered by the plan. Some plans offer a combination of investments in stocks or bonds while others offer a completely focused fund of either one asset class or the other.
Some plans give investors the option to deposit additional funds at their discretion. Some allow investors to withdraw some portion of their funds at any time, which is ideal for people who may encounter the sudden need for funds in the future.
The price you pay for a fund and the price you sell it for is always different. Taking this spread into account is important when switching from one fund to another or when buying a fund from a dealer, especially when you’re trying to gain higher ULIP returns.
Risk and Returns in ULIP
ULIPs have a high degree of risk because timing is crucial. Therefore, one should invest through a ULIP only if one is knowledgeable about the markets and is willing to stomach considerable volatility. It’s good for people with slight knowledge about the market.
If you’re looking for insurance protection, a ULIP may not be the most convenient plan. A traditional insurance policy doesn’t depend on the markets. A ULIP is also useful in getting middlemen or distributors and agents to connect and engage with you as they pass certain allocation instructions.
ULIP returns are usually good, but customers are unaware of the expected returns when purchasing these products. Also, in 2008, IRRs of 3.5 to 7 per cent could be seen; in fact, even in the 10% range is not uncommon in these investment products.
The average returns of most ULIP products are said to be 8% but in the short term, the cost of using one to invest in the markets may well exceed what one makes. One should also keep in mind that charges in ULIP are higher in the long run as compared to mutual funds, which suggests they cannot be interchanged.
Moreover, the cash value depends on the performance of the investments in the policy. The exact value that the policyholder will receive at maturity is not known or guaranteed because the insurer has to manage both the fund and premium value.
Bottom Line
ULIPs are equity-linked insurance plans that allow you to invest your money in a variety of modes. You can choose from several options, including the option to let the company decide how your money is invested. The flexibility in choosing the investment options available in ULIPs allows investors to enjoy more returns on their capital, which is why it is highly recommended to start investing in a Unit Linked Insurance Plan as early as possible.