ULIP (Unit Linked Insurance Policy) is a hybrid financial product that strives to meet the two most critical aspects of your personal finances, i.e., insurance and investments. Although it is primarily a type of life insurance policy, it also gives you an opportunity to invest and build a corpus in the long run.
When you pay the premium for ULIP, the insurer divides the amount into two parts. One part goes into offering you insurance protection against the uncertainties of life. The other part is invested in different funds across asset classes of your choice. You can decide where you want to invest as per your financial goals and risk-taking capacity.
Another significant feature of the ULIP policy is that it comes with a lock-in period of five years, making it an ideal investment choice for your long-term goals. Additionally, ULIPs are one of the few financial instruments that enjoy EEE (exempt-exempt-exempt) tax status. The premium you pay for the policy and the pay-out you or your family receives upon policy maturity or your demise are tax-free under different sections of the IT Act.
While there are many benefits of the ULIP policy, when it comes to investing your hard-earned money in it, you must be careful and consider the following factors to make an informed decision.
Choose the optimum sum assured
The sum assured is the amount the insurance company promises to pay your family in the event of your demise during the policy period. Typically, insurers allow you to choose the sum assured when buying the policy.
So, when you purchase a ULIP policy, it is advisable to choose a high sum assured as this amount will help you take care of their everyday expenses and be financially independent after you are gone.
Know about the charges involved
When you purchase ULIP, you must incur certain charges. Some of the common charges associated with ULIP include premium allocation charges, mortality charges, fund management charges, premium discontinuance charges, fund switching charges, etc.
However, not all insurance companies levy all these charges, and some insurers even return the amount charged under different heads. So, before you approach any insurer to buy ULIP, make sure that you know the different types of charges levied and their impact on the potential returns.
Today, most insurers have considerably lower charges than when ULIPs were first introduced in India. So, do your research well and choose an insurance company with the lowest costs.
Insurance company’s credibility
Since ULIPs are long-term financial products, you must investigate the insurance company’s credibility and track record in claim settlements before making the purchase decision. All insurance companies are heavily regulated by the IRDA (Insurance Regulatory and Development Authority of India) and must adhere to specific solvency standards.
So, you must check the insurer’s solvency ratio as it is a good indicator of its financial health and ability to satisfy long-term financial commitments.
Compare and choose wisely
Before you buy ULIP, you must be aware of all its features. You must also analyse the underlying funds of the ULIP and its past performance. This will give you a fair indication of the ULIP performance over a period, and you can make an investment decision accordingly.
Now that you know the different things to consider while investing in ULIP, do your due diligence and make the right decision. ULIP is an excellent investment option to have in your portfolio as it allows you to build wealth over a period while offering your insurance protection and tax benefits.