Ch. 14: 9 Things You Should Keep In Mind Before Investing In ULIP Plan

ULIP promises to be a smart, tax efficient investment avenue for achieving long term goals, but like any other financial product, before you sign up you must understand the long term commitments, terms and conditions of the product and match them with your own scheme of things.

Now that you have understood how a ULIP works from our previous articles, here’s a detailed checklist of a few things you should be aware of. Let’s go!

Things to keep in mind before investing in ULIP:

The goal of your investment

It is super important to have clarity on your long term financial goals before you start evaluating investment options.

• Jot down each of your financial goals (be it children education, marriage or retirement)
• Then set a target date when you would need this money and finally calculate the corpus you will need after factoring inflation.
• Now separate short term financial goals (with a timeline of 5 years), with long term ones where the money will be required only after a period of around 10 years.

Given ULIP is largely beneficial to achieve long term finance goals, ensure you invest in them only to achieve your long term financial needs.

Financial commitments

How much can you invest in a ULIP?

You should be aware that a ULIP is a long-term commitment. The money you invest will be locked in for a long and fixed period of time. The maturity benefit depends on the number of units you own and their respective market value.

• The market value is dynamic and changes on a daily basis, as per the market conditions
• And, the number of units you own depends on the amount you invest

Therefore, the more you invest, the more units you own. Make sure that the amount you choose will give you enough returns for the milestones you have in mind and fit your current budget.

Premium Payment Term:
Before you sign up for a ULIP, always understand the number of years you are committing to pay the premiums. Be extremely careful and check the documents you are signing carefully for “Premium Payment Term”. There have been several cases, where customers have bought ULIPs considering it to be a single payment product like a fixed deposit, later to realise to their surprise that they need to pay premiums for 10 years or suffer huge losses.

Be mindful of the lock-in period
As explained above, ULIPs are long term investment products that work well only if you are ready to invest for 10 or more years.

As per regulation too, all ULIPs come with a lock-period of 5 years. In this period, you cannot withdraw the money you have invested. What’s more, if you stop paying premiums within the lock-in period, you also end up facing huge losses and losing the risk cover.

Remember, you will not be able to withdraw the fund value till the lock-in period ends. If you do, then the insurance company might deduct significant charges for the same.

Select the fund as per your risk appetite

A ULIP offers you the flexibility to choose the fund your money gets invested in. You can choose from a variety of funds that invest in a variety of financial instruments from equity to debt to money market funds - depending on your risk tolerance, life stage, and goals.

For instance, If you are young (say less than 35) and your goal is to save for retirement, you can choose funds that largely invest in equity at the beginning of the term for better growth. As you move closer to retirement, you can conserve your accumulated funds by moving them into funds that invest predominantly in debt instruments.

Evaluate the fund’s past performance

While past track record is not any guarantee for future performance, it is always worthwhile to know how the insurance company’s fund performed against other funds in the same category and the index. This information is usually available on the insurance company’s website. If the fund has consistently outperformed the index and its fund category, then you know your money is in the hands of experts who have performed well in the past.

The charges associated with the product
Charges in the plan can have a significant impact on the long term ROI on your investment. Hence it is critical that you understand the charges and their impact well before you invest. You must also compare the charges that are going to be incurred against other ULIPs and other investment products suitable for your needs.

Type of charge	Why is it deducted?	How is it charged?	How often is it charged?
Premium Allocation Charge	To cover expenses like underwriting costs, agent commissions, medical expenses, etc.	Percentage of the instalment premium received. Deducted from the amount you invest.	Every time you pay the premium (In some products, it is levied only on the first year premium)
Policy Administration Charge	For the administration of your policy.	Cancelling the units proportionately from each of the funds you select	Monthly
Surrender or Discontinuance Charge	If you discontinue paying premiums and stop the policy during the lock-in period.	Lower of the percentage of the fund value, percentage of the annual premium, or the amount specified.	When your money is transferred from your current fund to a Discontinuance Policy Fund
Mortality Charge	For providing death cover to the insured.	Varies across individuals - depends on age, sum assured, gender, etc.	Monthly
Fund Management Charge	For managing your funds.	As a percentage of the fund’s value and is deducted before computing the NAV	Daily

Please note:

• Depending on the insurance company, these charges may vary. Some insurance providers may not levy certain charges as well.
• You must check if the ULIP product you are purchasing has the Return on Premium Allocation and Mortality Charges feature. This means, at the time of maturity, your insurer will add these two charges back to your fund value.

Switch between funds if needed

Switching is an important feature that can help you make timely changes in your fund allocation, whenever required.

When choosing a ULIP policy, consider the number of free switches, cost per switch, and flexibility of switches it offers. Charges may be involved with fund switching.

Your risk appetite changes with time. Consider that you have invested in a Debt-Oriented Fund. With time, your risk appetite as well as the performance of Equity-Oriented Fund have considerably gotten better. A ULIP gives you the option to transfer the units you own, fully or partially, from one fund to another - so that you can maximise your returns.

Look for customization options

Premium Payment Frequency
You can customise how frequently you want to pay the policy premiums. Generally, there are 4 premium payment options under Unit Linked Insurance Policies -

➔ Annual payment option
➔ Semi-annual payment option
➔ Quarterly payment option
➔ Monthly payment option

You can choose among these 4 premium payment options based on your convenience. If you think you won’t be able to afford large amounts every year, you can choose the semi-annual, quarterly, or monthly payment options. In case you can pay a large sum each year, you can choose the annual premium payment option.

Riders
Your policy can be enhanced by adding add-ons to cover particular situations. These additional features are termed ‘Riders’. Different riders are available depending on the insurer, and you must discuss and modify them during your ULIP purchase.

For instance,

Varun buys a Unit Linked Insurance Plan for a period of 10 years. He is required to pay an annual premium of Rs. 70,000. Along with the base policy, he opts for a Waiver of Premium due to Critical Illness Rider worth Rs. 5,00,000.

In the 7th policy year, he suffers from myocardial infarction - a critical condition listed in the policy document. Since Varun has the rider added, the insurer will waive off Varun’s policy premiums for the remaining 3 years. He will stay protected under the cover, without having to worry about future payments, till the end of the policy duration.

To get a detailed picture of all the riders available and their benefits, check out our article - ULIP - Riders.

Surrendering your policy

You must always be aware of exit points when you invest into any product. Here are two scenarios you should be aware of -

I. If you surrender before the lock-in period ends
The insurance company will levy surrender charges or discontinuance charges, as mentioned in the terms and conditions of your ULIP. This money will be returned only after the lock-in period of 5 years is complete. When you discontinue your policy, your fund value is transferred to a separate fund, called - the Discontinued Policy Fund. The money in the Discontinued Policy Fund earns an interest of 4% per annum, at the minimum rate, till the lock-in period ends.

In the unfortunate event of death during the lock-in period, the Discontinued Policy Fund amount is given to your nominee.

II. If you surrender after the lock-in period ends
You will be paid the fund value at the net asset value (NAV) - applied at that point in time. This means much greater returns.

Insurance Benefits

The policy offers a Death Benefit
If you are the sole breadwinner of your family who takes care of daily expenses, then in the unfortunate event of your demise, your family will face a huge financial burden - besides the emotional trauma.

ULIP offers a death benefit to your nominee, and provides them with financial aid to cope with the situation. The Death Benefit varies across policies, but is generally of two types -

➔ Either the sum assured or the fund value - whichever is higher
➔ The sum assured, plus the fund value

Please note:
ULIP is primarily a long-term investment option, with some benefits of insurance. If you majorly want to cover for the financial security of your family, then Term Insurance will be a better option for you.

Choose your nominee
A nominee is a person who receives the Death benefits of your Unit Linked Insurance Plan, in case of your unfortunate, untimely death. You can choose any financial dependent, like your spouse, children, or parents.

Understand the basic terms

Free Look Period
A free look period is a 15 days window given to you from the day your policy is issued. If you decide to cancel/return your ULIP due to any reason, you are entitled to a refund of the premium paid. No penalties, such as surrender charges, will be levied during this time frame. So if you have second thoughts about your policy, make sure you take the final call within the Free Look Period.

Grace Period
You may want to buy a ULIP but may not always be in a situation to make payments on the exact date. That’s where Grace Period comes to your rescue. It is the additional time period offered by insurers to make the premium payment. You can pay your missed premium instalment, during the Grace Period, without losing your ULIP cover.

The Grace Period differs according to the mode of payment -
➔ Monthly - 15 days
➔ Other - 30 days

If you fail to pay the premiums within this time frame, your policy will lapse and the benefits will be lost.

Revival Period
Insurance companies provide you with an option of reactivating your discontinued policy - within a specific time frame post the grace period. This period offered by the insurer to revive your ULIP and avail benefits pertaining to it is termed - revival period. It is generally for 3 years, but may vary across policies. The 3 years are counted from the date of the first unpaid premium that was due.

Consult a financial advisor

Get in touch with a person who can guide you through the whole process. Financial advisors are professionals who can advise you on decisions related to wealth management and personal finance. They can help you -

• Assess your current financial situation and future goals
• Suggest the fund you should invest in as per your goal
• Develop a comprehensive plan for everything - from the amount of premium to the duration of policy
• Track your investments and provide advice at every step of the way

Growing your wealth has become a priority to fulfil your and your family’s goals and dreams. A ULIP proves to be a powerful financial product for this. We hope this detailed checklist helps you evaluate your needs, and invest in a better future. Now, you can think about and decide where you want to buy your ULIP from - learn more about this in our next article.