A check-list for Investing in ULIP

Before investing in any financial product, it is important to be aware of the nuances of the product. In this write-up, we list down a few check-list you must consider before investing in ULIP

The ULIP, which is an acronym for Unit Linked Insurance Plan, over the past few years, has gained immense popularity among the investors in India. The fundamental principle of this unique financial product is that it offers the dual benefit of insurance protection and investment under a single plan. Although primarily an insurance plan, ULIP allows you to invest in different funds and earn valuable returns.

In ULIP, one part of the premium is used for insurance, and the other part is invested in different funds. You can invest in debts, equities or balanced funds based on your requirements and risk appetite. But, the question is how to choose the right ULIP. Here are five vital check-list to make the right decision.

Know what the investment offers

Since ULIP invests in various fund options, it is subject to market risks, and you must be aware of the same. The market risks of ULIP investment are the same as direct investment in mutual funds and other financial products. You must, therefore, ascertain your risk capacity and choose a plan that suits your needs.

ULIPs offers a wide range of fund options that you can choose depending on your financial goals. You can choose from the aggressive plans to the conservative ones. These plans are specially designed to suit the varying needs of the investors. The aggressive plans invest the bulk of the amount in equity funds, which are volatile but offer high returns. The conservative plans invest majorly in the debt funds and money market securities that are low risk and provide lower yields than equities. So, know what the plans offer before choosing one.

Premium Amount

Being an insurance production, you are subject to pay a premium for ULIP. Usually, the insurance companies offer three premium options, which are:

  • Single premium – under this plan, you must pay the premium for the entire plan upfront
  • Limited premium – as the name itself suggests, you must pay the premium only for a limited period depending on the duration of the investment you have chosen
  • Regular premium – under this plan, you must pay the premium throughout the policy duration at a fixed interval. It could be monthly, quarterly or annually

Associated Charges

Just like other insurance products, ULIPs too have certain charges like premium allocation charges, fund administration charges, etc. These charges reduce the overall value of the returns. Hence, it is paramount to know the various fees associated with the plan. Compare the charges of the different insurance companies and choose the one with lowest administration and management charges.

Solvency ratio

Before investing in ULIP, you must check the solvency ratio of the insurer. The solvency ratio is an indicator of the company’s ability to settle the claim when the need arises. It other words, it reflects the financial health of the company. If the solvency ratio of the company is 150% or above, you can be sure that you won’t lose your money even if the financial condition of the company is bad.

Past performance

Over the past few years, several ULIP funds have performed incredibly well and have offered significant returns. However, some funds have underperformed. Although experts suggest that the past performance of the performance does not guarantee assured returns in the future, it is worth knowing how the fund has performed over a period. It will give you a fair idea about how it is likely to perform in the near future. You can check the performance of the ULIP plans from credible sources before making an investment decision.