Choosing the correct ULIP for your family could make a lot of difference

The concept of the ULIP plan has revolutionised the horizon of savings, investments, and wealth creation. It is a unique financial tool that allows market-linked returns and investments along with insurance coverage protection. This is an umbrella plan allowing both insurance and investments in one frame. 

A part of the ULIP premium paid remains reserved for insurance coverage while the rest gets invested in the market. The market investments are a combination of equities, debt funds, and hybrid funds. Based on your requirements, risk appetite, and financial targets, you can flexibly alter your investment focus as per the market performance.

How do ULIPs help in wealth creation?

ULIP plan is highly essential for targeted wealth-building in the long run. It allows you to enjoy market-linked returns and benefits along with insurance protection. Some of the major reasons to consider ULIP investment include the following:

1. Opportunity for wealth creation:

   ULIPs allow you to make systematic investments at regular intervals, accumulating over time to fulfil specific financial goals like purchasing a house, renovating, educating children, marrying, or planning for post-retirement. So, ULIPs, if planned well, can be used to cater to all individual financial goals and help fulfil them efficiently.
   
   

2. Professional management:

   Professional fund managers manage all your ULIP investments to ensure optimum gains and returns based on market performance. All you need to do is choose the category of funds for your investment as per your risk appetite and then trust the fund managers to grow your portfolio.
   
   

3. Transparent:

   Transparency is crucial for any financial transaction or investment. ULIPs are highly trustworthy in this respect. You can regularly monitor your investment performance and make the necessary alterations as needed.
   
   

4. Flexible:

   ULIPs are highly flexible funds. Based on your risk appetite, financial goals, and investment tenure, you can easily switch between debt and equity funds depending on market performance without any capital gain implications. However, some insurers limit the total number of free switches that you can make during a particular year.
   Also, ULIPs allow you to partially withdraw your funds to meet sudden liquidity requirements without surrendering the entire plan.
   
   

5. Dual benefit:

   ULIP acts as a protective financial shield for family members in case of any unfortunate event, with the dual benefits of investment and insurance weaved into one single product.
   
   

6. Tax benefits:

   The premiums paid towards ULIP premiums qualified for tax benefits under Section 80C up to INR 1.5 lakhs per year. Moreover, the maturity and death benefits also qualify for tax exemptions under Section 10 (10D) of the IT Act of 1961 upto Rs 2.5 lakhs per year for ULIPs purchased after 1-Feb-2021 provided the sum assured is at least ten times the annualised premium. Also, there is no capital gain tax implication for any switch of funds between the different asset classes.

How do you choose the correct ULIP plan?

Choosing the correct ULIP plan becomes a challenge amidst such a plethora of options. You can always seek professional guidance. However, before that, you can always utilise the power of the ULIP calculator to get an idea about the future of your investment based on current market circumstances. It can reveal the plausible outcome of your invested fund based on the data provided.

However, before investing in this genre, you need to critically consider certain crucial factors to ensure that you have invested right and that it will help your family in the future despite your absence:

1. Step 1: Evaluating the risk appetite:

   There is no single formula or one-size-fits-all product here. Every individual's needs and targets differ. What works best for one of your friends might not prove to be equally beneficial for you. You must consider your current financial status and the amount of risk you are willing to take.
   
   Thus, step one for choosing the correct ULIP with the right funds is to assess your risk appetite. You could use a risk profile questionnaire or a psychometric analysis or simply analyse your asset allocation requirement to come to the right conclusion.
   
   If you have a higher risk appetite and do not worry about short-term volatility in the market, then you can choose more equity in your portfolio as an aggressive investor. Otherwise, you could also opt for debt allocation in your portfolio as a conservative investor. There is also a mid-way strategy of investing called the Balanced Strategy, which has both debt and equity allocation in the portfolio in a predefined percentage.

Equity funds usually have a higher risk-return trade-off, and debt funds give stability to your portfolio. You need to understand your needs and then choose according to your profile. 

2. Step 2: Estimated life coverage:

   ULIP is not only an investment tool; it also provides insurance protection coverage. It allows you to reach your financial targets while securing the future of your dependents and family members.
   
   In the case of any unfortunate demise during the policy tenure, your family members will receive the designated death benefit, which can ease the challenges to a certain extent.
   
   So, opt for significant coverage for your ULIP, which could help in providing some protection elements as well. Also, you need to opt for a minimum of ten times coverage for your premium in order to get a tax-free maturity benefit u/s 10(10D) of the Income Tax Act, upto Rs 2.5 lakhs of annualised premium.
   
   

3. Step 3: Understanding the charges:

   ULIPs have multiple charges, such as fund management expenses, premium allocation charges, discontinuation costs, surrender costs, withdrawal charges, and fund switching expenses. You must read the statements carefully to understand how and where such charges are levied in your portfolio.
   
   

4. Choosing the right insurance partner:

   For this, you need to consider the customer reviews. First-hand experiences cannot be faked. Moreover, you must also consider the claim settlement ratio and procedure. This ratio signifies the number of claims raised and the number of claims fulfilled. The higher this ratio is, the better.
   
   The solvency ratio should be ideally on the higher side to ensure the market stability of the insurer. To enjoy optimum benefits, consider the customer-centricity of the chosen insurance provider. 

Factors to remember while choosing the right ULIP for your family:

While making ULIP investments, you must remember certain key factors:

1. All ULIP investments are associated with multiple risks based on the underlying funds selected. So, you need to consider all the associated risks, including market risk, before investing, as it is not a traditional guaranteed product.

2. Check the tax aspect. Your post-tax returns are the best way to evaluate your portfolio's real growth, and that could make a big difference to your overall wealth.

3. ULIP investments maintain a standard lock-in of 5 years, during which time you are not allowed to surrender or withdraw any fund, either fully or partially. 

Conclusion

Thus, it becomes essential to choose the right ULIP for your family, as it could significantly impact your family’s financial security and future. Since ULIPs offer dual benefits of protection and investments, they need to be closely aligned with your family’s needs, financial goals, and risk appetite. You can select a ULIP that offers the right balance of protection and growth. Thus, a well-chosen ULIP is more than just a policy; it's a strategic move towards achieving peace of mind and long-term prosperity for your family.