Unlike traditional life insurance policies, a Unit Linked Insurance Plan gives investors the benefit of both insurance and investment under one single plan. Investing in a ULIP plan may seem like an easy process, but picking the right ULIP plan is not an easy task. Since awareness is the first step towards making efficacious decisions, it is important to choose the right ULIP plan as per your financial capabilities to maximize your returns. However, with the tricky nature of the product, it is common for individuals to make mistakes while investing in ULIP plans. This read will help you to identify the common mistakes that one can essentially avoid while investing in a ULIP plan.
Common mistakes committed while investing in a ULIP plan
- Not choosing the right plan
Many people do not evaluate their risk appetite, financial obligations etc. before investing in ULIP plans. The chances of risk are higher when you select the wrong plan. And in case of ULIP, they are not just about equity, but also offer a wide range of funds option to suit every risk profile.
Example: You have the responsibility of your family and other obligations like home loan, child’s school free etc. Thus, you can opt for a balanced fund available in the ULIP plan where there is not much risk involved.
- Avoid buying it for the wrong reason
Most of us buy ULIP plans during the tax saving period, which clearly states that the motive behind buying ULIP is to get tax benefit. But, at the same time, buying this plan with right motive based on your financial goals will help you to achieve idealistic returns.
- Choosing the cheapest plan
One of the biggest blunders you must avoid is choosing the cheapest plan while investing in a ULIP plan. For most of us any low cost insurance plan may seem attractive, but it may not necessarily reap higher benefits. Therefore, it important to consider the past performance of the product and compare various ULIP plans before you choose one.
- Buying with a short-term perspective
Most people exit from the ULIP plan after the lock-in period of 5 years, which apparently is a wrong move as confirmed by industry experts. ULIP products can take a longer duration to outperform as they are loaded with frontend charges. Therefore, it is vital to stay in the investment for 10 – 15 years to make the policy work to its fullest.
- Limited awareness about the product
Most of the people who invest in ULIP plan are not aware about the product. It is important to know the features, benefits and understand the flexibility offered by ULIP plans.
How is ULIP Different from Other Insurance Plans?
ULIP is a unique product that offers both investment and insurance option under one single integrated plan. With the help of switching facility the policyholder can switch between funds, increase or reduce the level of protection, etc. In ULIP plans, the premium goes towards meeting the expenses, insurance cover and investing in capital markets, equity mutual funds, etc. And most of the ULIP plans will provide the facility to track your portfolio by getting information on regular basis. To top it all, it also allows you to withdraw from your funds after a minimum lock-in period of 5 years.
Traditional Insurance Plans
However, the traditional insurance plans provide you with a fixed income return, tax and safety benefit, and risk cover. They also offer guaranteed maturity proceeds and invest in low-risk return options. Also, most of these plans do not have an investment option and will be invested as per the company’s discretion.
Is ULIP the best option?
Yes, ULIP is the best option when it comes to long-term investment. One must invest for a minimum period of 10 – 15 years to get favourable returns. Right from providing transparency, flexibility, life cover to tax benefits and long term investment. They, in turn, allow you to switch between the funds which allow flexibility in shifting asset allocation.
Above all, it also provides the following advantages:
- Death benefit
If the life assured dies during the policy tenure, the nominee of the policy will receive the death benefit which will be higher of fund value or sum assured. The death benefit paid is completely tax-free under section 10 (10D).
- Partial withdrawal
You can make a partial withdrawal after completion of 5 year lock-in period.
- Maturity benefit
The policyholder will receive the fund value on maturity of the policy which is tax-free under section 10(10D) of the Income Tax Act, 1961.
Therefore, if one avoids the above said mistakes, a ULIP plan can benefit you in the long run. Also, if you are a risk taker, then ULIP is an ideal choice for you.