ULIP Investment: Risks Associated and How to Mitigate Them
A Unit Linked Insurance Plan (ULIP) combines insurance and investment into one package. The purpose of ULIP plans is to provide wealth development as well as life insurance, with the insurance company investing a portion of your money in life insurance. The balance amount is invested in a fund that is based on equity, debt, or both. This could help you meet your long-term goals such as retirement preparation, children’s education, or any other significant event for which you wish to save.
Benefits of ULIP Plan
Before we discuss the risks, we should first understand what are the ULIP’s benefits:
- Life Insurance Cover – The dual benefit of an investment with life cover offers security with a money saving scheme for long term financial goals. This comes in handy in case of emergencies or unfortunate events.
- Flexible Option – ULIPs are often designed to allow you to move your portfolio between debt and equity based on your risk appetite as well as your understanding of market performance.
- Long Term Financial Goals – Be it your children’s education, retirement planning, travelling in old age or wealth creation, ULIPs with 5-year lock-in period is a perfect fit for your financial plans.
Risk Factor of ULIP Plan
ULIP plans are one of the most misunderstood financial tools, despite the numerous features and benefits they provide. Due to the built-in investing component, ULIPs are often seen as risky assets.
- Growth Factor
A ULIP’s growth option is typically equity-oriented. Over 65% of the funds in such plans are invested in equities. The rest is invested in government and corporate debt.
Higher market volatility and investment returns are associated with equity. It is possible you might have negative returns for intervals. However, if you consider a 10 to 15-year period, equity has been found to provide superior returns. In ULIPs, you can also choose between debt and balanced funds.
- Charges and Fees
A Premium Allocation Charge is deducted from your premium paid in the first years of the policy at a specified percentage. This is subject to a higher fee.
Mortality charges are calculated based on a variety of parameters such as your age, sum assured and are deducted monthly.
The price imposed by the insurance company for the management of various funds in the ULIP is known as the Fund Management Charge.
Partially withdrawing funds from your ULIPs is an option. Some plans allow you unlimited withdrawals, while others limit you to 2-4. A fee is levied accordingly. If you wish to switch funds, that too might incur you a fee.
Switching is the process of shifting your funds or investments between possibilities. There are alternatives for free fund transfers up to a particular amount per year. Any additional changes may be subject to a fee.
A monthly charge is levied for the administration of your policy, and it is deducted from all funds chosen monthly by the cancellation of units. This fee can be a fixed amount or calculated as a percent of your premium.
- Risk Factor
Unlike ELSS, ULIP is not as diversified. Hence, the risk is a bit higher when compared to other investment options.
ULIPs are widely regarded as one of the best saving/investing tools available, allowing you to optimise your investment returns. Depending on your risk tolerance, you have unlimited freedom to invest your money in the fund options of your choice. In other words, ULIP investments are less vulnerable to market volatility risks.
If considering ULIP plans, take into account the types of ULIP, ULIP benefits, and your own long-term goals. You can buy a ULIP plan online or offline and the minimum entry age to invest in the plan is only 18 years. All you would need to buy a ULIP plan is age proof, identity proof, address proof, and a recent photograph.