ULIPs have grown to become a popular investment option for a large number of investors these days. The trend is only set to continue on an upward trajectory as more and more insurance companies are coming up with unique propositions to lure customers. What was earlier seen as a rather expensive affair has now turned into a preferred one, thanks to the advent of new technologies. ULIPs basically offer the dual benefit of insurance coverage while also allowing the policyholder to invest in a range of instruments like stocks, mutual funds and bonds.

In this article, we will list out the five most important things you need to understand before investing in a ULIP.

  • Keep a track of the charges:The first and the most important thing you need to be aware of before investing in ULIPs are the charges. Typically, a ULIP comes with a number of charges ranging from fund management charges, premium allocation charges, mortality charges, policy administration charges, etc. These charges tend to reduce the money you actually invest into a fund. So, don’t get your head turned by an impressive marketing copy, you should instead read up on all such fees and charges and if and only if you are okay with them should you make an investment.
  • Don’t do it for the tax: While it is common knowledge that ULIPs offer tax benefits, investing in one solely to save on taxes is a really bad move. Before buying a policy, you need to clearly understand that ULIP is a long-term investment aimed at creating wealth for the future, especially for milestones like retirement or for a child’s education. A policy bought just to reduce your tax liability would often result in you buying a product that doesn’t suit your needs.
  • Know your risk appetite before investing: A common theme among ULIP investors is that they tend to invest in one without knowing the risks involved. For starters, a lot of people choose to invest in the equity option without actually realising that it is volatile subject. Before investing, you should understand that a ULIP is a market-linked investment and isn’t likely to offer fixed returns. At such a point, you need to make your decision with much more knowledge on your side.To begin with, you should go through the performance of a few funds and their CAGR rate for the last few years. This will give you a clear idea of the returns you could expect for your investment. As a rule of thumb, avoid investing in funds that have consistently underperformed in the market.
  • Compare between multiple ULIPs: Although the market for ULIPs in the country is still smaller, almost every insurance company have at least a few of their products available. This means that there are plenty of options to choose from. Choose policies from companies that have performed well over the last few years and choose the ones that suit your specific requirements. You will find all the information about funds from the official websites of all insurance companies.
  • Go for maximum sum assured to generate better returns: As mentioned above in an earlier point, a ULIP comes with a number of charges. This means that if you are paying a smaller premium, the returns you are likely to get will be on the lower side as much what you pay will be tied up paying these charges. So, opt for the maximum sum assured or an amount closer to that to enable the generation of better returns. A report has suggested that the ULIP market in India has grown by a 38% CAGR over the last few years, with the peak yet to arrive. So, get your piece of the pie right now with your first ULIP investment and secure your future.
Author's Bio: 

Bindhu Singh, Financial Advisor at Farmer's Insurance