10 Things You Need to Know Before Investing in a Unit Linked Insurance Plan

How safe are unit-linked insurance plans when it comes to long-term investments? This is a question many people ask before investing in such products, and rightly so.

After all, as the name suggests, these investments tie up your money in such products for several years – and if you don’t know what you’re doing, you could lose all your hard-earned money. So, you need to know ten things before investing in any unit-linked insurance plan.

1) Why is it called ULIP?

The term ULIP is an acronym for a unit-linked insurance policy. If you’re familiar with ULIPs, it might surprise you that they are not all that insurance-related. However, since 2000, most insurers have referred to them as investment plans because of their high exposure to equity markets.

So unlike traditional insurance policies, which pay out only upon death or terminal illness (and sometimes even then with certain conditions), many of these plans give you some protection against loss arising from low returns or stock market volatility. This protection, however, comes at a price and thus should be used only by those who can afford it.

2) When should I invest in ULIP?

Unit-linked insurance plans may not be for you if you don’t have a specific goal. Also, because of various charges and restrictions, ULIPs should ideally be held till maturity. If you need to liquidate an investment halfway through its tenure, it will end up fetching far less than what you had initially invested.

So instead of going for a ULIP, take out term insurance instead (at least ten times your annual income). Finally, always keep your risk profile in mind before investing or taking out any insurance policy.

3) How are the returns calculated?

Check whether your insurance company uses an adjusted surrender value method of calculating returns. Under ASV, you get back only what’s left of your premiums and growth once you surrender or withdraw from your plan. If you ask for your money early, say after ten years, only the excess over what has been given back will be paid out.

So if investments have grown by 50% but you’ve surrendered 20%, only 30% will be returned; under ASV, it will be just 15%. Insurers that promise guaranteed returns can do so as long as they give you at least 80-85% of what’s there at maturity.

4) Is there any entry load?

Do not invest in unit-linked insurance plans that charge an entry load. A typical entry load for the unit-linked insurance plan is 2% of your investment, and some plans charge as much as 3%. While it might seem like a small fee, it will eat your returns. For example, even if you invested Rs 1 lakh and lost 2%, you would lose Rs 20,000 from your investment before it started!

These fees might be levied monthly or annually, depending on the plan chosen. This fee is usually deducted when investing money, so you do not see it immediately, but over the long run, it adds up.

5) How much will be the cost of premium?

The premium depends on how much coverage you want and how long you’ll be paying into it. You must understand what happens if your compensation goes up mid-contract or if you choose an investment fund with high charges rather than low payments. Check that all these fees and costs are mentioned clearly in your plan documentation. If they aren’t, ask your insurer or adviser for an explanation.

As well as asking about costs and fees, make sure that you have explored other options to understand what difference it will make to your money whether or not you use a unit-linked policy. Before investing in unit-linked insurance plans (Ulip), know your maximum loss limits and exit charge amount, if any.

6) What are the main features of ULIP?

Unit-linked insurance plans (ULIPs) used to be known as equity-linked plans. Still, they changed their name after Sebi (Securities and Exchange Board of India) said that using ‘equity’ for these financial products misleads investors about what they are. Many people still use these terms interchangeably, however.

While ULIPs were designed initially for mutual funds to offer additional protection from risk with an insurance cover, most companies have now started selling them independently. Despite being called unit-linked schemes, ULIPs do not involve units or shares. Instead, they invest your money directly into equity markets and give you an allocation of units that indicate how many risks you take on.

7) Will my ULIP policy lapse if I stop paying premiums?

Just like any other insurance policy, ULIPs come with an expiry date. The period over which premiums have to be paid is called ‘policy term,’ which is usually 5-10 years long. Once you stop paying premiums for your policy, it will lapse, and no claims will be made on it after that point. So if you stop paying your ULIP premium before its policy term expires, then yes, there is a chance that your policy will lapse.

However, if you decide to buy another plan with another insurance company before your existing one lapses, you get access to all of the available maturity benefits.

8) Which age group should I invest in?

It depends on your goals and situation. If you want security for your old age, look for plans that invest predominantly in stable assets like government bonds. These funds are not as volatile as pure equity-based mutual funds and will help protect you from market downturns. However, if you don’t need regular income from your investment, it’s best to choose pure equity plans that grow over time and may even allow you some access to your invested money when needed.

Growth funds should be considered only if they have significant allocation towards stable assets that give you assured returns through regular dividends or interest payments and long lock-in periods of three years or more.

9) Are there any surrender charges with a ULIP policy?

Most ULIP plans have surrender charges. If you choose to terminate your policy before it matures, you will have to pay a certain amount of money. The costs vary depending on how long you stay invested in an insurance policy; typically, they are higher for longer-term policies than for shorter ones.

So if you want complete flexibility with your investment and don’t want to get stuck with any penalties, opt for a term plan rather than a ULIP.

10) Is there an option to switch from one insurer to another if my insurer does not suit me anymore?

Life insurance plans are locked in with an insurer for some time, usually 15-20 years. If you would like to change your insurer, you can’t do so. If you have issues with your insurer, there is always an option to opt out of your plan by surrendering it.

It does mean that you will lose all or some of your investment depending on how long it has been since you started paying premiums and what options or riders (such as double benefit) you have chosen in addition to death cover.

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