ULIP stands for Unit Linked Insurance Plan. A United Linked Investment Plan (ULIP) is an instrument which combines the security provided by an insurance plan with the opportunities provided by an investment plan. It is a unique product which aims to integrate insurance as well as investment requirements. Its structure is similar to that of a mutual fund. This is how it works :
- You pay a periodic premium to the insurance company
- A part of the premium is used to provide you with an insurance cover
- The remaining amount goes to equity or debt market
- In the event of death, nominees are paid the sum assured
- In case of maturity of the policy total value of the fund will be paid to the policy holder
5 steps to select right ULIP
We present a 5-step investment plans that will guide investors in the selection process and facilitate them to choose the right ULIP.
- Understand the concept of ULIPs
- Focus on your need and risk profile
- Compare ULIP products from various insurance companies
- Go for an experienced insurance advisor
- Does your ULIP offer a minimum guarantee?
- Read the fine print before investing in ULIP
Things to keep in mind while Selecting a ULIP
- Buy insurance for risk cover
- Do not consider insurance as an investment option
- Preferably buy only a term policy
- Do not prefer savings-linked insurance policies
- Remember not to be carried away by persuasive agents and publicity.
- Buy ULIP only if your horizon is long term.
- Not insure yourself if you are a lone bird.
- Do not insure if you are wealthy.
- Do not insure the child
- Read the fine print carefully
1. Buy insurance for risk cover
The purpose of an insurance policy is to protect the family members of a person from any financial complexities in case of his/her premature death. Such unfortunate eventuality to a breadwinner in the family can put the other family members in serious financial problems. Insurance seeks to offer financial help in such times.
2. Do not consider insurance as an investment option
The primary aim of the insurance policy is to provide a risk cover. Therefore a part of the premium paid is first appropriated towards this purpose. The balance amount is invested in financial instruments, which are generally very safe ones. Also, the commissions and charges are substantially higher than other investment options.
3. Preferably buy only a term policy
Term policies are pure insurance products with no investment option. They are the cheapest and the simplest among the available plans. But cheapest does not mean they are inferior to other costlier insurance policies. As far as the basic purpose of risk cover is concerned, there is no difference. And usually for most of us this term policy must be more than sufficient.
4. Do not prefer savings-linked insurance policies
In contrast to the term policies, savings-linked insurance policies are such as money-back, endowment and whole-life provide the risk cover and also give back some returns to the insured at the end of the policy term, in case nothing happens to him/her in the interim. The premiums of such policies are much higher than the term policies. This assurance of getting some returns at the end of the policy term is why most people choose for such savings-linked policies in comparison with term policies. Therefore, a person may be wealthier if he were to buy the cheaper term policy and invest the balance amount, which would have otherwise gone towards high premiums of saving-linked policies, like MFs. In this way he would be risk-covered and also generate higher returns.
5. Remember not to be carried away by persuasive agents and publicity
From their business viewpoint the insurance companies and the agents may be keener to sell saving-linked policies in comparison with the term policies, as the premiums and commissions are much higher. And hence the advertisements and promotions may speak more about such policies. Therefore, it is for the insured to keep his interests & needs in mind and not be carried away by influential agents and publicity.
6. Buy ULIP only if your horizon is long term
Unit Linked Insurance Policies (ULIPs) offer an alternative to traditional policies where the returns will be market-linked. Further, one can also choose one’s own investment objective amongst equity, debt and balanced funds. However, the charges in the first years are quite high. Thus the actual benefit of ULIP starts accruing only if one has a long-term investment horizon.
7. Not insure yourself if you are a lone bird
Insurance is for the benefit of the dependents. Thus, if you are single with no one being financially dependent on you, it is not necessary for you to buy an insurance policy.
8. Do not insure if you are wealthy
If you are a person of plentiful means, you have lots of wealth – properties, bank balances, investments, etc. in your absence; this may be more than enough for your family and dependents to continue living comfortably. A few lakhs of rupees from an insurance company may not make any material difference to their future financial security.
9. Do not insure the child
Any unfortunate eventuality involving a child is no doubt emotionally very shocking. But it usually does not hurt the family financially. Whereas, insurance cover is for justifying the financial difficulty, that may arise with the death of the insured. Therefore, taking a policy for a child is meaningless. It is a needless expense.
10. Read the fine print carefully
As they say ‘the devil is in the details’. Therefore, understand the characteristics of the policy, the charges etc., before you buy an insurance policy. Further, most insurance companies offer a 15-day look-in period after you have taken the policy. Go through the terms and conditions in the policy very carefully. And if you feel that it does not meet your necessity, you can cancel the policy. You may have to pay some administrative charges, but this would be much better than investing on to a bad policy for years to come.
Insurance is a long-term contract generally spanning over decades. Also, these contracts have very little flexibility. A wrong insurance product can financially injure for a very long time, unlike many other financial products. Therefore, one should be extra careful and cautious when deciding on how much to insure, how long to insure, which policy to buy, etc.
Why People Buy Insurance?
- Tax Saving
- To save/invest
- Agent’s compulsion
- To plan for retirement
- To provide security for children’s education
- Bank’s demand for security
- Relatives’ recommendation to buy insurance
- Friends’ influence
- Parents’ influence
- To cover life risk
What happens if payment of premiums is discontinued?
Discontinuing premium payment can be of two kinds such as;
- Discontinuance within three years of commencement
- Discontinuance after three years of commencement
Discontinuance within three years of commencement
If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for renewal within the period allowed; if the policy is not renewed within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later.
Discontinuance after three years of commencement
In this case at the end of the period allowed for renewal, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount equivalent to one full year’s premium, the contract shall be terminated by paying the fund value.