Unlike mutual funds, United Linked Insurance Plans (ULIP) are best to invest in as it offers long-term wealth creation with a life cover plan. But, investing in ULIP requires paying a fixed premium for the selected cover amount. While some portion of the premium provides coverage, the remaining is used to invest in debt or equity instruments.
Also, when it comes to maximizing returns, people are usually drawn to policies that offer more benefits. And for long-term investments, ULIP is a great option as it provides various advantages and services, such as the ability to switch between investment plans, make partial withdrawals, and choose between equity, balanced, and debt funds.
However, before going for ULIP investment, you must analyze if this plan is suitable according to your requirements or not. Therefore, this article will discuss things to consider before investing in the ULIP plan.
Types of ULIP Plans Based on Funds
1. Equity ULIP
In Equity ULIPs, funds are part of the payment used to purchase shares of one or more companies. These funds offer higher potential growth. However, their direct link to the fluctuations in the financial market makes them riskier than other ULIPs. For this reason, equity ULIPs funds are ideal for investors with high-risk appetites.
2. Debt ULIPs
In debt ULIPs, investments are made towards debt instruments like debenture, Corporate bonds, Government bonds and securities, and fixed-income bonds. While these instruments pose a moderate risk, the return associated with them is also moderate.
3. Cash Funds
Some ULIPs offer investment towards the lowest-risk cash funds instruments such as term deposits, cash deposits, and market funds. While the risk factor with these instruments is negligible, the returns provided by them are the lowest among all the ULIPs. If you are a highly risk-averse investor, this is a great choice for you to consider.
4. Balanced Funds
Some ULIPs offer investment in both equity and debt ULIP to balance the risk and rewards. As a result, returns offered by balanced funds are more stable than those offered by pure equity funds.
5. Liquid Funds ULIPs
If you are an investor seeking short-term financial goals and have a low tolerance for risk, liquid ULIP investment is your best option. Unlike other ULIPs, the maturity period for these funds is relatively shorter, usually ranging from a few weeks to a month. Instruments such as treasury bills call money, and certificate deposits are a few examples of liquid funds.
Tips to Choose the Best ULIP Plan
1. Compare and Analyse the Funds
It is important to compare and analyze the funds of the products, including their objective and last performance, to get the best investment fund. However, keep in mind that past performance does not indicate future performance.
Moreover, ULIP plans can be a great option to meet your life coverage and investment requirements and help you achieve your financial goals. But, ensure to know all variables before investing to make a well-informed decision.
2. Opt for Sum Assured
Sum assured is the amount promised to the policyholder’s nominee in case of the former’s death. In case of the policyholder’s unfortunate demise, this amount will be used to care for his family. Thus, it is advisable to opt for a sufficient sum-assured amount before selecting an investment plan.
3. Identify the Objective of the Insurance and Your Risk Profile
ULIP is a long-term investment; hence you should identify your insurance objectives to choose the plan that fulfills your insurance requirement. Other than this, it is crucial to ensure your risk profile to maximize the benefits of your return and fulfill your financial objectives.
4. Solvency and Credibility Ratio of Insurers
The solvency ratio measures an insurer’s ability to meet its long-term debt obligations. Before investing in the ULIP plan, it is important to check the credibility of the insurance provider. As insurance companies have high regulations which ensure their solvency guidelines.
Conclusion
To sum up, ULIPs are long-term investment plans, but their return varies according to the tenure of investment, withdrawal period, and insurance provider’s policy. Not only this, ULIPs are also simple to use, but they also have flexible options for risk and returns. However, to maximize your return and avoid risk, it is important to be organized and consider these tips before investing in ULIP.
