Have you ever heard the phrase “Your money must work for you?” It means that you should have control of your finances and make sure that your financial stability and security are constantly improving. And financial security is not limited to just you – it also includes your loved ones.
If you want to make sure that your family or partner will be financially taken care of even if anything happens to you, but are also looking for an investment opportunity, then a unit linked insurance plan, or ULIP, might just be the solution for you.
What is ULIP?
A unit linked insurance plan is more than just an insurance policy – it is also a flexible investment policy. In fact, it is both, combined into a single insurance plan.
With this, the question arises – how does it work?
Well, just like with every other insurance policy, you have to pay a premium for your insurance. But unlike in the case of the other policies, not all of it is utilised for your insurance coverage. Part of it is, of course, intended for just that, but the rest is invested in equity, debt, or balanced funds instruments.
You choose where and how the money is invested
One of the greatest benefits of ULIP is just how flexible it is. That applies to the amount of your premium that is invested, as well as the fund allocation. As the policyholder, you can decide which funds to invest in, based on your own wants and needs, your investment capabilities, and your risk appetite.
But how does the investing work?
Well, it’s fairly simple, actually. The insurer, meaning the company where you took out the unit linked insurance policy, pools the money from its policyholders and then invests it into their chosen fund instruments. Then, it allocates units to each individual insured person, based on how much they invested. The value of a single unit is called net asset value or NAV. As the value of the asset in which you invested changes, these changes are also reflected in your NAV, where you can monitor them frequently.
Types of ULIP payouts on maturity
There are two main options for payout for ULIP.
Type 1 ULIP provides the beneficiaries with either the sum assured or the value of your investments, also known as the fund value – whichever is higher at the moment of maturity.
Meanwhile, with Type 2 ULIP, your beneficiaries will receive both the sum assured and the fund value. As expected, the costs for Type 2 ULIP are relatively higher.
What are the main benefits of a ULIP?
Monitoring your investment and relocating your funds
The fact that you can monitor how the value of the assets you invested in changes is just one of the many benefits of a ULIP. Be it an increase or a decrease; it will all be reflected in your net asset value, thus ensuring transparency of your investment.
However, ULIP is not only a transparent policy but also a flexible one. If you notice that your investment is losing its value, you can decide to move your money to a different equity or fund. Keep in mind, though, that most companies offer a few free switches, but after that, there is a fixed cost for such changes.
The option of a top-up
If you ever decide you want to invest more than just your regular premium, you can do just that with ULIP. It offers the option of a top-up for your premium, meaning that if your investment is performing well, you can decide to invest more, thus maximising the return on your investment. However, that is absolutely not compulsory– you can simply decide to do it if or when you have some idle cash.
Increasing your sum assured
Another great benefit of ULIP is that you can always increase your sum assured. If you decide for Type 1 ULIP, which offers the payout of either the sum assured or the value of your investments, whichever is higher at maturity, you might want to increase your sum assured at a certain point – and you can do just that with a unit linked insurance policy.
Partial withdrawal of money after a certain lock-in period
A very important aspect of ULIP is also the option of being financially prepared in the case of an emergency. This policy allows you to make a partial withdrawal of your funds after the five-year lock-in period, which can really come in handy in case of any unforeseen costs or even opportunities for investment in, say, real estate.
The flexibility of adding other riders to your policy
You can also customise your ULIP policy with riders – optional features that bring additional protection. One such example is the accident and disability rider. As the name suggests, this rider increases the amount of your policy’s sum assured in the event of accidental death and also ensures that your life cover will continue in case of a disability resulting from an accident.
Some potential disadvantages worth considering before deciding for a ULIP
The complexity of a unit linked insurance policy
When learning about the fact that ULIP combines insurance with an investment policy, many people fear that this is a lot to comprehend. After all, this is a single financial instrument with a double focus. And if you want to be successful in your investment, you also need to check on the value of the assets you invested in regularly.
This may be too much for some people, but think of it this way – ULIP may actually be a blessing in disguise, as you only have one financial instrument to manage, instead of separating insurance and investments, thus having more things to think about.
This influences any type of investment, and ULIP is no exception. Which is why you need to be aware of the fact that the latter is not a good short-term investment – in fact, with a long-term investment, you will reap higher benefits. The value of your assets will likely be the highest after ten to 15 years. The insurance companies also try to make sure that people do not treat this as an option for a short-term investment by enforcing the five-year lock-in period.
The risks of ULIP
Let’s be honest, any investment is a risk, and ULIP is no different. Its plans are directly linked to the performance of the market, and as the policyholder, you are the sole bearer of the risk of the investment portfolio. This is not necessarily a bad thing, though, as long as you are realistic about your risk absorption capacity.
Every ULIP comes with certain fixed charges, such as the charge for policy administration, for the option of changing the allocation of your funds or switching the funds you invested in, as well as the charge for fund management done by your insurance provider. A mortality charge is also part of it, and it is imposed by the insurance company because it provides a death cover for the insured. There are other charges that might be part of your cover as well, but these vary from insurer to insurer.
So, is ULIP a good idea for you?
In short – if you are looking for one financial instrument that can combine insurance and investment, then ULIP is perfect for you. But if you feel uncertain about investing your money, or simply do not have the time to deal with your investment, then perhaps a regular term cover might be better suited to your needs.