ULIPs, or Unit Linked Insurance Plans, are among the most sought-after financial products in the market. They are a special type of insurance and investment product, where the premium you pay is partly used for life insurance and partly invested in different funds you choose.
ULIPs have many benefits, such as being flexible, transparent, tax-efficient, and allowing you to switch funds. But they also have some drawbacks and risks, especially if you don’t make informed and careful choices. Here, we will discuss the common errors people commit when purchasing a ULIP plan and how to prevent them.
Mistake 1: Not choosing the right fund option
When understanding what is ULIP plan, you must know that it lets you select from various fund options. The risk-return profile of each fund option varies, depending on how much equity and debt instruments are in the portfolio.
Various factors influence the choice of fund option, such as your risk tolerance, investment duration, and financial objectives. For example, if you are young and have a long-term goal, you may choose an equity fund with higher returns and fluctuations.
Selecting the wrong fund option can result in subpar returns or losses, depending on the market situation and your expectations. For example, if you invest in an equity fund and the market plunges, you may lose much of your fund value. On the contrary, if you invest in a debt fund and the market surges, you may forgo the possible gains.
Mistake 2: Not paying attention to the charges and fees
ULIP plan comes with various charges. These charges are subtracted from your premium or fund value, and they can lower the net returns of your plan.
To reduce the fees, compare different ULIP plans and pick the one with the lowest charges for the same benefits. You should also choose online purchase, as it can help avoid the agent commission and other extra costs. Moreover, you should select a longer policy term, as it can decrease the premium allocation charge and surrender charge.
Mistake 3: Not utilising the fund switching feature
In ULIP, you can change the proportion of your investment in different fund options depending on your changing needs and preferences.
Using the fund-switching feature can help you adjust your portfolio according to the market conditions, rebalance your risk-return trade-off, and enhance your returns. For example, if you are invested in an equity fund and the market is bullish, you can switch some of your funds to a debt fund to lock in your profits and reduce risk. Alternatively, if you are invested in a debt fund, and the market is bearish, you can switch some of your funds to an equity fund to take advantage of the low prices and increase your returns.
Not using the fund-switching feature can result in missed opportunities or increased risks, depending on the market scenario and your goals.
To use the fund-switching feature effectively, monitor the market trends and your fund performance regularly and make informed decisions. Also, follow a disciplined approach and avoid frequent switches, as they may incur additional charges. Moreover, avoid switching based on emotions or impulses, which may lead to poor outcomes.
Mistake 4: Not availing the partial withdrawal facility
ULIPs allow you to withdraw some of your fund value after a certain lock-in period without affecting your insurance coverage. This means you can access your money in case of any emergency or short-term need without surrendering your ULIP plan.
For example, suppose you need money for a medical emergency or a wedding. In that case, you can withdraw a part of your fund value and use it for your purpose without compromising your insurance protection or long-term investment. Additionally, if you withdraw a part of your fund value, you will have to pay a lower surrender charge rather than deciding to terminate your ULIP plan later.
Not availing of the partial withdrawal facility can affect your financial planning or force you to surrender your ULIP plan, depending on your situation and requirements.
To use the partial withdrawal facility wisely, check the withdrawal limits, such as the minimum and maximum amount, the number of withdrawals, and the withdrawal charges, before withdrawing. Maintain a minimum fund value per the policy terms and conditions to avoid any lapse or discontinuance of your ULIP plan. Withdraw only when necessary and not for frivolous or impulsive reasons, as it may affect your long-term goals.
Mistake 5: Not reviewing and renewing your ULIP plan
Reviewing and renewing your ULIP plan is important, as it can help you ensure that your ULIP plan is aligned with your current and future requirements and expectations. For example, if you get married or have a child, you may need to increase your insurance coverage as your dependents and liabilities increase. Similarly, if you are nearing retirement or have achieved your goal, you may need to change your fund allocation as your risk tolerance and investment horizon decrease.
Not reviewing and renewing your ULIP plan can result in inadequate insurance coverage, mismatched investment strategy, or lower returns, depending on your situation and objective.
Conclusion
ULIPs are an excellent financial product that can help you accomplish your two insurance and investment goals. However, they also need cautious and informed decision-making, as they have various factors and features that can influence your returns and risks. By steering clear of the five errors mentioned here, you can optimise your ULIP plan and reap its benefits.