Things you should know about ULIP before Investing

Every person wants to make the best use of their income and with the constant inflation in price; it is high time to invest your saving in the best investments so that it grows for both personal and professional purposes. There are two most common ways to invest your income - Systematic Investment plan (SIP) from mutual funds and Unit Linked Insurance Plan (ULIP). SIP helps you invest your savings at regular interval of time in mutual funds, whereas ULIP offers you twin benefits of both investment and insurance.

ULIP is one excellent investment avenue which serves as a perfect combination of both investment and insurance. In ULIPs, some amount of the premium paid by policyholder will be transferred towards life while the remaining premium amount is transferred towards investment. But before investing in these dual-role investment plans, one must thoroughly understand what is Ulip.

We all look for the best returns when it comes to investing our income. ULIP has become one of the most popular schemes to invest your income in the past few years. It is definitely an excellent option for investment because of its wealth creation feature and tax-saving ability.  These are not similar to any other insurance policies as they offer the investors the choice to invest in equity and/or debt funds. Yes, ULIP offers an opportunity for policyholders to make the choice of investing either in equity or debt funds. Despite choosing any one option, this investment also provides an option to invest premium in a mix of debt and equity funds in varying proportions.

These incredible properties of ULIP definitely make it one of the best ways to invest your amount for both tax savings and good returns. In simple words, ULIP provides good opportunity to make a reasoned investment along with tax savings. But, it is advised to mark out few points before investing, to avoid any error or dissatisfaction later. Here are five things which should be considered before putting your money in ULIP:

1.    The motive of investing: The foremost thing to look for before investing is to understand the motive of your investment. Find the purpose of purchasing a plan; whether you are investing for retirement or your child’s education. Do a thorough research on each and every point related to the investment. Most of the time policyholders are not fully aware of the pros and cons of the policy; so research carefully and then invest. Do not make tax saving as your only motive for investment. This may lead to a wrong investment decision. Plan carefully, study carefully and invest carefully. Before anything else, one should clearly assess the agenda of purchasing an insurance policy.

2.    Charges associated with them: There are multiple charges associated with ULIP investment such as premium allocation charges, policy administration charges, mortality charges, and fund management charges. These charges are deducted from your investment amount but there are also some mandatory charges that are supposed to be paid by policyholders. Premium allocation charges are deducted from your premium and are higher in initial years, but tend to reduce after the third or fourth year of the policy. Administration charges are deducted on a monthly basis towards your general administration cost. Mortality charges are variable in nature and depend on the mortality rate of the insured, whereas fund management charges range from 0.5% to 1.5% and are charged for managing your investments. These additional charges will definitely force you to think twice about your investment plans.

3.    Risk appetite: This is the most important factor which should be carefully studied before investing in ULIP. Market risks on ULIP are similar to other common funds or direct investments. These risks are carried by the policyholder and hence these must be studied carefully by the investor. Most investors pick an equity option without any prior information or monitoring past performance of funds.  ULIP is also a market-related fund and any fixed return is not guaranteed by any company. Thus, choose smartly and research on each and every aspect of the policy. There are many websites that provide accurate information about the funds; so do not ignore such crucial reports regarding your investment.

4.    Long-term investment: Before investing in a ULIP make sure that you invest for a minimum of 5 years. There are many disadvantages of short-term investment such as: If the policyholders terminate ULIP before 5 years, then the tax deduction availed will be reversed. Despite tax deduction, if you stop paying the premium amount your life cover will lapse and if anything happens to you, your nominee can only avail for residual fund value and not the vale that was assured. So understanding the threat factor is not enough; you must also consider your investment period before putting your money into a ULIP.

5.    Compare: The perfect way to choose the best out of the numerous options is to compare smartly. Based on your preference and several guidelines available in markets, choose what suits you the best. Compare the advantages and disadvantages of every plan and then invest your precious money. Though it may be a difficult task to choose one from wide options, it is definitely not an impossible one. There are numerous websites and insurance agents that can help you in this situation; seek their help and make the most suitable choice.

Your income is the most precious belonging as you have earned it with all your mental and physical strength and in difficult times, these investments may help you out. These investments prove to be the best partner in case of any mishap. In this dynamic world invest your money wisely and smartly to make the most appropriate use of your income. So instead of going for SIP, opt for ULIP that provides dual benefits. ULIP offers you comparatively more returns and is less risky. There are definitely many factors such as good returns, tax benefits that will force you to choose ULIP over SIP, but we suggest that you invest your income in these risky funds only after carefully understanding and researching as to what is ULIP, risks associated, additional charges to be paid and returns that they are supposed to provide to their policyholders or investors. Research and study thoroughly every part of the fund.