ULIP is a financial tool that offers a dual benefit of insurance & investment, allowing an investor to create wealth using funds like debts & equities. The decision of choosing the appropriate funds depends on the risk tolerance level, financial objectives, & investment horizon. Unlike term insurance, ULIP offers a part of the premium to be paid towards life insurance &the rest towards investment. This plan offers flexibility in the allocation of funds & premium payment, which allows customisation of the plan as per financial objectives & risk tolerance level.
How does ULIP work?
After understanding what is ULIP, let us know how it works:
ULIPs are financial products that combine insurance factors with investment. So, a part of the premium amount paid is diverted towards insurance, & the other one is towards investments in debt, equity, or hybrid funds. Fund managers are appointed to assist professionally in managing funds to help them grow over a period of time. Also, it offers an option to switch between the funds according to the market conditions. At the time of maturity, you will get the total investment value, which will further give security & wealth creation.
Let us now understand how ULIP works with the help of an example:
Mr Saahil buys a ULIP at 30 years of age, having a 30-year policy tenure. The premium amount is partially allocated towards the life insurance, amounting to INR 1 crore, & the remaining is invested towards equity. There exist two cases, as mentioned under:
Case 1: In case Saahil dies at the age of 45 years due to an accident:
In this case, his family members will receive the higher of the two amounts: a death benefit of INR 1 crore or the fund value at the time of his demise, ensuring the beneficiaries receive the maximum possible benefit.
Case 2: In case Saahil survives the 30-year policy tenure:
In this case, Saahil will receive the fund value that would have been accumulated depending on the fund’s performance, which will further help you achieve financial objectives.
Tips to Find the Best ULIP Plan in India?
ULIPs are the most preferred plans that help in securing long-term capital growth along with the financial future of family members. They are considered a source of fund creation & help to achieve tax benefits for the policyholder. The returns on unit-linked insurance plans are market-linked, which means they offer higher returns than traditional plans. An investor, while looking for the Best ULIP Plan in India, should consider certain tips that will help them make an informed decision.
Personal Investment Goals:
ULIPs offer multiple options of funds to an investor to choose from, namely, debt, equity, & balanced funds. If funds are invested in equity, it comes with high risk & high returns, which best help fulfil long-term financial objectives. The debt funds offer lower but stable returns, which best help fulfil short-term financial objectives. Balanced funds maintain a balance combining the benefits of both debt & equity, & maintain a balance between risks & returns.
An investor’s decision will depend upon risk tolerance level, personal investment objectives, & financial objectives. This will help an investor make an informed decision, ensuring the allocation of funds best suits the financial requirements.
Investment strategies offered:
Systematic Transfer Plans & lifecycle-based investing are some of the examples of investment strategies used in mutual funds. An investor should look for those ULIPs which offer these strategies & best suit their financial objectives.
Claim Settlement Ratio:
The claim settlement ratio is the ratio of the number of claims approved & the number of claims received by the company for settlement. It is measured every year & can be seen on the company’s website. This helps the insured make a wise decision for the insurance company with the highest claim settlement ratio. The higher the claim settlement ratio, the better it is.
Solvency Ratio:
The solvency ratio is the ratio which tells whether an insurance company will be able to fulfil its claims in the near future or not. As per IRDA, an ideal solvency ratio required by an insurance company is 1.5. The higher the claim ratio, the better it is.
Compare ULIPs:
While looking for a ULIP, an investor should compare the different plans available in the market on the basis of certain factors, such as financial objectives, investment horizon, & relevant costs, which differ from one plan to the other.
Performance of ULIP funds:
The performance of a ULIP should be reviewed over a longer tenure, as ULIPs contain a combination of insurance & investments. The policyholders can select from debt, equity, or balanced funds, depending on their risk tolerance level, financial objectives, & investment horizon.
Flexibility:
ULIP is a flexible plan which allows an investor to select from different funds, such as debt, equity, or both. Along with this choice, they are also given a choice to choose the premium payment mode, i.e. monthly, annual or one-time mode. An investor should look for certain options, such as switching, top-ups, or partial withdrawals, etc., to help them achieve the most out of it.
Risk Profile & Financial Stability:
An investor should study the acceptable level of risk & the required financial stability level to make an informed decision & select the funds that best align with the financial objectives.
Charges:
Look out for the associated charges of the ULIP plan, such as policy administration charges, premium allocation charges, fund management fees, switching charges, mortality charges, etc.
Conclusion
ULIP is considered to be a mutual fund scheme that offers dual benefits of investment & insurance. These plans are market-linked plans, providing life insurance coverage & offering long-term capital growth along with tax benefits. These plans are meant to meet objective-based planning, such as children’s education, wealth creation, retirement planning, etc. It also provides financial security to the family members & helps meet long-term financial objectives.
