You must have heard about Unit Linked Insurance Plans (ULIPs). However, before buying a ULIP, you need to find out whether you actually need it. The main purpose of life insurance is to safeguard people and their dependents financially. Therefore, firstly, you need to see if you have dependent. For instance, your parents, spouse, and children. Hence, if no one is dependent on you, you don’t need to get a life insurance cover.

Among the different types of insurance plans available, term insurance plans are pure protection insurance plans, whereas ULIPs come with two components — investment and insurance. The unit-linked insurance plans are a combination of investment and insurance. Hence, the premium that the investor pays towards his ULIP gets divided, and a part of it goes towards his/her insurance coverage and the remaining for investments. Note that the value of ULIPs are based on market conditions.

Features of ULIPs

  • The premium can be paid either monthly, semi-annually or annually.
  • The term generally ranges between 5 to 15 years.
  • A portion of the premium is deducted for various charges such as policy administration, fund management, and allocation charges. After that, the rest of the premium goes towards life insurance and investment in mutual funds, bonds or stocks.
  • With ULIPs, policyholders can choose to opt for either high-risk funds or debt-oriented funds.
  • High-risk funds provide more exposure to equity, whereas debt-oriented funds are relatively risk-free.
  • Similar to MFs, premiums are pooled together to form a unit fund. These units are then allotted to investors and NAV (Net Asset Value) is declared. The NAV then changes daily on the basis of the performance of the fund.

Things you should be aware of before opting for ULIPs

Once you have established your financial goal and the type of ULIP needed to achieve it, next compare the ULIP offerings in the market. Compare the premium payments, ULIP performance, background expenses, etc. Additionally, to ascertain the returns from investments in the particular ULIP, investigate the nature of funds that the ULIP invests in.

ULIPs can charge up to 1.35 per cent as the fund management portion in the form of expense ratio in the equity portfolio. However, if it is not equity, you might be charged less. Note that the investment part can range from 100 per cent equity to 100 per cent debt or another percentage in between. Experts suggest that investors should invest based on their risk appetite. Investors also get the option to move from equity to debt within the same ULIP product.

Consider the risk factor of ULIPs. When compared to schemes like ELSS, the risk in ULIP is generally a bit high, as ULIP investment is not as diversified as compared to ELSS. ULIPs also come with a lock-in period of 5 years. If a ULIP policy is surrendered in the first 3 years, the insurance cover ceases to exist immediately. Additionally, the surrender value can be paid only after three years.