Saturday, May 18

Mistakes to avoid before investing in ULIPs

The insurance sector has a plethora of options that provide coverage for life as well as health ailments. But one such product that is increasingly gaining popularity in the life segment is a Unit Linked Insurance Plan or as popularly referred to as ULIP.

What is ULIP?

Unit Linked Insurance Plan as the name suggests is an insurance tool that has an investment component attached to it. A ULIP generates returns to the investor by investing in various funds – equity-based, debt-based etc. Unlike a pure insurance policy, the insured has the protection of life cover, and investment prospects both included in the amount of insurance premiums.

Moreover, ULIP benefits include a deduction for the premiums paid under Section 80C of the Income Tax Act. The maturity benefits are also exempt from the purview of taxation as prescribed under Section 10(10D).

While the above answers ULIP policy questions, there are a few mistakes that one must avoid when investing in a unit-linked insurance plan.

Selecting an Incorrect ULIP

The selection of a unit-linked insurance plan depends on your financial goals. While the insurance portion offers financial protection to your loved ones, the investment part needs to be carefully monitored for its valuation. If you are willing to assume risk, you can invest in an equity-focused fund. On the other hand, a debt-based fund can be a suitable choice for risk-averse investors. Most times, individuals select the wrong plan and do not realise until it is almost near the maturity date. You can use a ULIP plan calculatorto estimate the returns from your fund based on your risk appetite, time horizon and financial goals.

Considering ULIP as a 5-year goal

A ULIP investment has a lock-in for a 5-year duration. It does not imply you withdraw your investment after the end of the lock-in duration. ULIPs are predominantly an insurance product. Most individuals make a mistake of considering the primary objective as investing and redeem earlier. With investment in equity markets, financial advisors suggest running the entire tenure of the fund to avail significant returns. In other cases, the volatility of the markets may not generate an expected fund value at its redemption.

Incorrect Investment Reason

The last quarter of each financial year witnesses the highest demand for a unit-linked insurance plan. This demand is due to the tax benefits available under ULIPs. Most individuals invest in ULIPs with a view to reduce their tax liability and not from an investment perspective. Your financial objectives must be clear when you buy a ULIP whether you want an insurance cover or capital appreciation or dual benefits of both.

Opting for a Single Premium Plan

The ULIPs have an option to pay a one-time premium or at periodic intervals. You can select the payments depending on your cash flows. A single premium payment does not give the benefit of rupee cost averaging, which otherwise is available in case of regular payments. Moreover, you can invest for a longer duration when you opt for a regular premium option. It is affordable because the amount of premium is lower than a single payment and spread across the tenure of the policy.

Ignoring the Switching Option

The unique feature of ULIPs is the ability to switch between different ULIP funds during the life of the investment. Switching gives an option to the investor to rebalance their investments. Also, there are no tax implications on moving from one fund to another. This option is available so that any corrective adjustments can be made to meet their financial goals.

These are the most common mistakes that a rookie investor commits when it comes to ULIPs. After reading this information, make sure you select the best investment fund after evaluating all possible options.