What is a ULIP?
Unit-linked insurance plans (or ULIP plans) allow policyholders to avail of multiple benefits. Their value lies in providing policyholders with life insurance coverage in addition to allowing them to invest their funds under the plan. ULIPs require policyholders to pay a premium. In return, they provide the policyholder with life coverage as well as the opportunity to make investments based on the policyholder’s preference. ULIP investments may be in debt or equity funds or could be balanced between both.
With the insurance coverage, you get financial peace of mind that if you are not around, the death benefit of the policy would help your family meet their financial needs.
How do ULIPs work?
To understand whether ULIP is safe or not, let’s understand how they work.
- Buying a ULIP
You can buy a ULIP and choose the the policy term, premium payment term, optional riders, and the fund to which you want to allocate the premium. - Premium allocation
After you pay the premium, part of it goes into providing life insurance coverage and the remaining would be allocated to the chosen market linked fund. The fund invests in market-linked securities, giving you market exposure. - Fund performance
Depending on how the market performs, the fund value would grow or decline. - Flexible features
You can switch between the chosen market linked funds, make partial withdrawals after the lock-in period of 5 years, add top-up premiums, and enjoy other flexible features, all subject to terms and conditions of the plan. - Policy benefits
If the life assured passes away during the policy term, insurance company will pay the death benefit. On the other hand, if the life assured survives the policy term, the fund value would be paid as a maturity benefit.
Are ULIPs safe?
Now, let’s understand – is ULIP safe?
To understand how secure it is to invest in a ULIP policy, consider these features –
- Long-term horizon
ULIPs allow you to invest for a long-term horizon. You can choose a long policy tenure to enjoy the benefit of compounding and grow your corpus. - Different market linked funds
ULIPs offer different types of market linked funds. Equity funds have a higher risk profile, while debt funds have lower risks. You can also choose balanced funds for a moderate risk profile. Depending on your risk profile, you can choose a market linked fund that matches your risk tolerance level. - Switching option
ULIPs provide a fund switching option , enabling policyholders to move their investments between different market linked funds depending on factors such as their risk appetite , market volatility etc.. With switching, the risks can reduce. If the market falls, you can switch from equity to debt to safeguard your fund value. This would bring down the risk and protect the generated returns, too.
However, here are some factors that you should consider when buying ULIPs –
- Lock-in period – There’s a lock-in period of 5 years during which partial withdrawals are not allowed but you can surrender the policy. However, the fund value will only be paid after completion of lock in period.
- Charges – ULIPs have different types of charges, which are deducted from the premium and fund value. Check the charges when buying the plan.
- Market volatility – The returns from ULIPs are not guaranteed*. If the markets turn volatile, you might incur a loss.
Features of ULIP plans
Unit-linked insurance plans have a number of features that make them stand out in the market today. When you check if ULIPs are safe, it is important to know their features too.
Some of these have been mentioned below.
Long-term policies:
ULIPs are one of the preferred instruments for those looking to commit on a long-term basis. As of 2010, ULIPs have a 5-year lock-in period during which premiums are required to be paid. Additionally, policyholders are not permitted to withdraw their money from the plan during this designated timeframe. Prospective buyers should not get dissuaded by this lock-in period, as it allows for greater returns to be generated.
Flexible:
ULIPs allow policyholders to customise their plans as per their preferences by awarding them with a significant amount of flexibility. This is apparent in the partial withdrawal feature, permitting switching funds and premium redirection in addition to several other opportunities. These flexibilities aren’t visible in most other insurance and investment products and ought to be appreciated.
The transparency provided is top-notch:
All charges incurred under a ULIP are clearly outlined in the company providing the plan’s brochure. This ensures that all policyholders are equipped with all pertinent information prior to investing their money and aren’t caught unawares in the future. This level of directness is extremely useful, especially since it isn’t always easily found in today’s day and age.
Goal-based:
ULIPs are an extremely useful tool in terms of allowing policyholders to invest their money, keeping in mind their financial goals. There exists a number of funds that fall under a given ULIP which cater to the varied investment goals of a given policyholder.
Dual benefits:
By purchasing a ULIP, policyholders avail themselves of both financial security in the form of life coverage as well as investment benefits.
Key takeaways
- ULIPs are life insurance plans that give you the potential to earn market-linked returns by investing in different types of market linked funds.
- When you buy a ULIP, you pay the premium, part of which is used to provide life insurance coverage and remaining would be allocated to a fund of your choice.
- ULIPs do not offer guaranteed returns. The fund value depends on the market linked fund you have invested in and the market volatility.
- The long-term nature of ULIPs with the flexibility of fund switching makes them a safe option.
- Do check the ULIP charges and lock-in period before buying the plan.
- You can assess your goals and choose a ULIP that matches your financial needs
- Other features of ULIPs include transparency, flexibility, insurance coverage, etc.
Conclusion
When wondering – is ULIP safe – always consider the features of ULIPs and the flexibility that they offer. With the choice of market linked funds offered and the switching benefit of ULIPs, you can enjoy good returns from ULIPs when you stay invested over the long-term horizon.
