How safe it is to invest in ULIP plans?

No one wants to taste the risk unless it lures you to have high returns!

Biking in a ring is dangerous but the person does it to attract people and earn more.

Rahul, aged 35, purchased a ULIP plan when he got his second job. His previous job offered him a life cover of Rs.20 lakhs but when he switched the job, the policy ceased to an end. Rahul was married and this is why he was more conscious of having securities and building wealth in life. He understood his responsibilities well as he along with his wife was eagerly waiting to welcome the arrival of a baby in the family. Rahul explored the best options of investment apart from saving a percentage of income for unexpected expenses.  He knew that in the time of crisis, often relatives and friends are handbound which hardly enable them to extend help. It leaves not only Rahul but many like him to think of making safe investments and having bigger amounts of savings.

Amongst many, ULIP is considered one of the most preferred and commonly accepted financial instruments to make investments. Let us know more about ULIP and find out if ULIP is safe or not?

But before that you must first understand what is a ULIP?

What is a ULIP?

A ULIP is an insurance policy that provides life insurance cover to the policyholder. It is also a safe investment option for those who wish to build not an epitome of love but a corpus of wealth. ULIPs make for the best investment option as these:

  • Offer guaranteed tax savings under section 80 C and section 10(10D).
  • Gives you higher returns with the power of compounding.
  • Allows you with the flexibility to choose between different types of funds before making an investment.
  • Permits you to switch between different funds considering the age, risk involved and appetite of risk before investing.

Why should you choose a ULIP for investment?

You must be wondering that ULIP involves investment in varying funds that include equity, debt, and combined funds. That would entail with it risk linked to the market returns. It attracts the possibility of losses. But the brighter side of ULIP is that these investments are made in the long run, that is, for a period of 10 years or 15 years. In such a long time, you are able to create a big amount of savings. Apart from investments, you also get a life cover which is helpful for the family in case of the sudden demise.

ULIP: what does it involve?

ULIP is a wider life insurance cover that offers you cover for life as well as help manage funds for you. The Net Asset Value (NAV) of the funds is declared on a daily basis. The returns on the ULIP is the difference between present day NAV and NAV at the time of issuance of ULIP. For example, if NAV at the time of purchase is Rs.100 and is Rs.120 after some time, then the return on your ULIPs is 20%.

The returns on ULIP depends on the type of fund like equity, debt, and balanced funds. As the funds are operated in accordance with the market fluctuations, it may seem risky to you. But is investment in ULIP risky? Let us see further.

Are ULIPs risky?

ULIPs are not as diversified as other investment tools like Equity Linked Saving Scheme(ELSS) and hence it is believed to be a high risk investment insurance policy. The best element of choosing a ULIP is that it has a lock-in period of 5 years which is a boundation but a motivation in a broader aspect for you to invest. 

If you wish to surrender the policy anytime sooner than three years, then the insurance cover would end immediately. 

How safe is it to invest in ULIPs?

The rate of return in ULIPs depends on the type of funds you choose. Return on some of the common funds are :

Name of the company Rate of Return in 5 years
Aditya Birla Sun Life Insurance ULIP plan 15.92%
Aegon Life Assure Plus Debt Fund 7.70%
Bajaj Allianz Life Equity Mid-Cap Pension Fund 26.19%
Bajaj Allianz Life Group Stable Gain Fund 11.61%
Bharti AXA Guarantee Builder Steady Money Fund 8.10%

The rate of returns are variable but the best fact is that you do get assured returns from what you invest in as a premium portion.

  • When you choose a ULIP plan from one insurance company, the insurer collects all the money invested in the pool. They further bifurcate the total corpus into the fund units that have some face value. After the allocation, the policyholder (you) are given certain units that are in proportion to the amount invested by you.
  • The insurance regulator IRDA has put a cap on charges and net reduction in yield for the investors. The idea is to control the impact on the ULIP returns.

Hence, you can consider investment in ULIP a safe option. Buying ULIP policies entail with it different charges like allocation charges, administration charges, mortality charges, and fund-management charges. When you plan to invest in a ULIP, consider your affordability as insurance companies will charge you even if the plan is withdrawn before the completion of the lock-in period.

If you are convinced to buy a ULIP and are not sure of how to proceed, the next section is a must for you to read. Here is what you need to know more about buying a ULIP.

Things to know before buying a ULIP plan in India.

Here are a few things that you must know before buying a ULIP plan in India:

  1. Identify your objective of buying a ULIP: You should know the very purpose of buying a ULIP plan. ULIPs are a long term investment product that helps you save money over a period of 10 years or 15 years. When buying a ULIP, think whether you need the plan for your retirement or for your child’s higher education. 

→ If buying a ULIP for your retirement, then you can pick plans that pay you heavily after the maturity date. These ULIPs can be converted to annuity plans for periodic payments that can pay you until you live. 

→ For your child’s higher education, buy a plan that pays you sufficient money to manage expenses.

  1. Consider charges involved in buying a ULIP: You have read above about different charges that are involved in buying a ULIP. Think and decide whether you will be able to afford these expenses or not.
  2. Identify the funds that you will invest the money in: You can choose to invest the money in equity funds, debt funds, and income funds.
  3. Do read the terms and conditions before making the final purchase.
  4. Know what is the premium payment term and what is the lock-in period. It will give you an idea of what is the time you cannot withdraw the funds.

Conclusion

ULIPs are market-linked insurance products that involve risk of returns. But the financial tool gives you sufficient flexibility to make investments. If you love to take risks and plan to build a huge money portfolio, you must definitely invest in ULIP plans. You can explore the ULIP policies online or ask your financial advisor to suggest a product that suits your requirements.

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