Should I invest in ULIPs?
UNIT Linked Insurance Plans (ULIPs) are policies that club insurance with investment.
Besides getting your basic insurance cover, ULIPs offer between four and six options when it comes to choosing the investment mix.
These range from funds, which invest in 100 per cent equity to those that invest in 100 per cent debt securities.
Wealth offers pointers on ULIPs to help you make a well-informed decision before investing in this product.
ULIPs have something called the ‘premium allocation charge’. This means, the company charges a percentage of the premium towards the premium received. For instance, if you are paying a premium of Rs 45,000 per annum, you are charged a premium allocation charge of approximately 15 to 71 per cent on this amount. The net premium, after deducting this charge, gets invested.
This charge, usually, depends on the Best Ulip Insurance plan chosen. and remember: your per annum return is calculated on the money invested and not on the premium paid.
A significant proportion of this charge is passed onto an insurance agent as commission. From the third year onwards, most ULIPs have a premium allocation charge anywhere from two to five per cent.
Choosing the best ULIP
When it comes to mutual funds, you can find the best performing schemes through research.
But this is not possible with ULIPs because each plan will differ in terms of the expenses you need to pay upfront. This means that you have to go with what an agent tells you.
ULIPs: When its okay to switch
WE are a cautious species. We pray before every important event, we look at auspicious factors when we name our children and we consider broken mirrors a bad sign. It’s no wonder then that when we make a killing in the stock market, we first think about how best to preserve it.
People book profits or switch to a safer option in a bid to play safe. But while that makes sense for those dealing in shares or with mutual funds, does it make sense for those having equity unit linked insurance policies (ULIP)? ULIPs allow you to switch from equity fund option to debt, usually without any fees. But there is a key difference between ULIPs and other stock market investments. ULIPs are a combination of insurance and investment. Since it is your protection cover that you would be tampering with, your decision to switch needs to be well thought out before you exercise it.
ULIP is a combination of insurance and investment. Of the total premiums paid, some of the money is set aside for the insurance cover and the rest is invested in a fund.
This involves the cost of insurance or life cover that is allocated for the plan. Age, health of the policy holder, and the amount specified for coverage determines this charge. The basis of this charge depends on the type of ULIP. That is, this charge is initially deducted from the entire sum assured. At the final stage, it is charged on the difference between the sum assured and the fund value. In some ULIPS the mortality charge is levied on the sum assured for the whole term.
Should I close the policy?
The cost-structure in ULIPs varies significantly, not only across different insurance companies, but also across different ULIPs from the same insurance company.
So, each policyholder will have to work out the final exit/retain strategy based on his/her specific policy terms. However, there are three factors to be considered:
— Entry Charges or allocation charges
— Annual Costs or fund management charges
The focus, here, is on equity-based ULIPs. the basic idea is to check whether it is better to continue paying premiums or instead start investing.