Are you looking for a financial product that merges your investment plans and insurance needs into one? Then, a ULIP plan would be a wise option. ULIPs serve two purposes – they offer life coverage and market-linked returns under one plan itself. Buying ULIPs has become easier in the last few years due to the availability of most of the required information online. Buying insurance online has also become more common in the last few years. However, in one’s hurry to buy a ULIP plan, whether online or offline, they may overlook some important factors and make some common mistakes. These mistakes can lead to long-standing issues in the future. We list a few mistakes people make while buying ULIP plans, to help you avoid them.
How does a ULIP plan work?
Before you buy a ULIP, it is important to understand how it works. ULIP insurers use your premium for two purposes – to invest it in the stock market or debt funds and to build the life insurance coverage amount that you have chosen. The coverage amount will help your loved ones when you are no longer present. The amount used for investment can be utilised to meet your financial goals once the returns have been accumulated and the lock-in period is complete. You can choose to invest in equity funds, debt funds, or a mixture of both kinds of funds.
Mistakes to avoid when buying ULIPs
- Not going through the charges
A ULIP plan has several charges, such as fund management charges, administration charges, fund switching charges, surrender charges, and so on. While some of these charges are deducted from the premium, the others are subtracted from the NAV (Net Asset Value) of your ULIP funds. Not all insurance companies levy all these charges. Some companies may not have a certain charge. For instance, some insurers do not levy any charges no matter how many times you switch funds, while others may have a limit on free fund switches. Therefore, before you go ahead with a ULIP, do remember to look at the charges and see if they align with your budget.
- Not reviewing your risk tolerance
There are various types of ULIP plans. While some are focused heavily on debt funds, others are directed towards equities. Some may offer more liquidity than others. Which option you ultimately choose depends to a large extent on your risk profile. Equity funds would be more suitable for those who have a high-risk appetite, while debt funds or liquid funds would be more appropriate for those with a low-risk profile. While there is definitely the option to switch funds in a ULIP plan, the kind of investment you make and the type of ULIP policy you choose still affect your returns.
You should only go ahead with an equity ULIP if you are okay with the ups and downs of the market.
- Focusing on only one aspect of ULIPs
A ULIP should ideally be bought by those who are looking for both life insurance and wealth creation. If you are only looking for a simple life insurance policy, then it would be better to opt for a term plan or a whole life insurance plan. And, if you are looking for wealth creation only, then mutual funds would be preferable. This will help you save on the mortality charges of your investment amount.
ULIPs are immensely beneficial since they offer two benefits in one product and thus simplify two vital aspects of financial planning. Therefore, when you are buying a ULIP plan, ensure to focus on both aspects of it. Remember to review your life insurance coverage from time to time as well.
- Investing in a ULIP with a short-term approach
Experts suggest that it is more profitable to invest in a ULIP plan with a long-term approach. ULIPs have a lock-in period of five years; so, there is no possibility of exiting the policy before that. However, even after the period ends, it is advisable to continue it for more years as you get to enjoy extended compounding benefits, high returns, re-compensation of charges which are levied in the initial years, and much more. Investing in a ULIP with a short-term outlook might provide you with quicker returns but does not allow you to maximise the benefits of a ULIP.
If you want to have a smooth and profitable ULIP journey, then ensure to avoid these common mistakes people make while buying ULIP plans.