ULIPs or unit-linked insurance plans are a considerable step towards attaining financial security and stability. ULIPs are a unique product blending in investment and insurance that offers a variety of advantages, especially as per the income tax slabs. Adding ULIPs to your portfolio not only offers life cover but even helps in wealth creation over the long run. Let’s understand the ways to enhance the advantages of investing in ULIPs –
⮚ Go for a longer investment horizon
ULIPs are a long-term instrument. The longer you remain invested, the more time your fund gets to grow and the better it is to weather the market ups and downs. This long-term investment horizon is advantageous for attaining considerable goals and permits the compounding effect to work effectively for higher returns.
⮚ Understand your risk tolerance level
Every retail investor has a unique kind of risk profile, which can range anywhere between conservative and aggressive. ULIPs address this diversity by endowing distinct fund options. Equity-linked funds are best suited for those with a high-risk level, endowing higher returns but with higher volatility. In contrast, debt funds are stable but provide lower returns, suited for conservative retail investors. Evaluating your risk appetite assists in choosing the correct fund in a ULIP, which ensures your investment is in line with your level of comfort when market fluctuation is concerned.
⮚ Periodic premium payments
Consistency is majorly the key in ULIPs. Periodic premium payments make sure that your insurance policy stays active, maintaining both the investment and life cover components. Missing payment can result in policy lapse, which may infer losing out on policy cover and the accumulation of funds. Timely payments keep the insurance active and permit your investments to grow uninterruptedly.
⮚ Stay informed about the charges
ULIPs come with distinct charges like fund management fees, allocation fees, policy administration fees and mortality fees. Such fees are deducted from the premium that is paid, impacting the investment figure. Being aware of these charges and choosing plans with lower costs can ensure that a higher portion of your premium is invested, leading to potentially better returns.
⮚ Maximise the use of tax benefits
ULIPs provide attractive tax advantages as per tax laws. Premiums paid qualify for deductions per Section 80 C while the maturity proceeds are free of tax as per Section 10 (10D). Such tax benefits make the ULIP a prudent tax-efficient investment product, lowering your taxable income and increasing thorough returns.
⮚ Balanced fund allocation
Investment diversification within ULIP is essential. A balanced allocation throughout debt and equity funds can assist in optimising returns and managing risks. Your allocation must be dependent on your goals and risk tolerance level. Over time, as your risk appetite and goals change, you can adjust your fund allocation accordingly.
⮚ Top-up your premium
In the case you have additional funds, you can invest them in ULIP via top-up premiums. Such top-ups do not just enhance your investment in the fund but even considerably enhance your insurance cover, resulting in higher maturity advantages.
⮚ Utilise the switch option
One of the major features of ULIPs is the flexibility to change between funds. This permits you to adjust your investment in response to the changing conditions of the market or goals. However, it is crucial to make better decisions and not impulsively switch funds.
⮚ Review and rebalance regularly
Periodically assessing your ULIP investment assists in keeping track of its performance against your goals. Portfolio rebalancing includes adjusting the equity proportions and debt depending on the performance of the market and risk tolerance level, ensuring your investment stays aligned with your goals.
⮚ Consider adding riders
Riders are additional benefits that can be attached to your ULIP policy for enhanced protection. Options like accidental death benefit, critical illness cover, or disability rider provide extra security. These riders come at an additional cost but offer increased peace of mind.
⮚ Note the lock-in
ULIPs come with a mandatory lock-in of five years. This encourages long-term investing and assists in accumulating a considerable fund value. Being aware of this lock-in period is important for liquidity planning and avoiding premature withdrawals which can be costly.
⮚ Keep an eye on fund performance
Regular monitoring of fund performance is vital. This not only assists in understanding how your investments are performing but also in making better decisions about remaining invested or switching funds.
⮚ Plan out for long-term financial goals
ULIPs are especially suitable for long-term goals such as retirement planning or saving for a kid’s education owing to the compounding effect. The longer the investment time frame, the more crucial is the growth potential.
⮚ Avoid over-insurance
While availing a higher cover amount may appear like an excellent idea, it is crucial to select a cover that mitigates your needs. Over-insurance can result in unnecessarily heavy premiums with zero proportional advantages, potentially lowering the amount available for investment.
⮚ Do not ignore the insurance component
The major goal of ULIP is to offer life cover. While the investment portion is crucial, ensuring the cover is sufficient for your family member’s financial security in your non-presence is essential.
⮚ Avoid frequent switching
While the option to switch between funds is a significant advantage, frequent switching can lead to charges and can disrupt the investment strategy, affecting compounding.
⮚ Understand the exit process
If you need to exit a ULIP, be aware of the surrender charges and terms. Early withdrawal can lead to high surrender charges and can also impact insurance coverage.
⮚ Read the fine print
Always thoroughly read the policy document. Understanding all the terms and conditions, including charges, benefits, and features, helps in making an informed investment decision.
⮚ Seek professional advice
In the case you are not sure about how to go ahead, consult with a financial advisor. They can assist you select the correct ULIP and finance options depending on your scenarios and goals, ensuring your investment is in alignment with your thorough financial plan.
⮚ Leverage loyalty additions
A few ULIPs reward long-term retail investors with loyalty add-ons, which are additional units added. Remaining invested for longer periods can thus enhance the thorough policy’s return.
By religiously following the above tips, you as an investor may not just secure your financial future but even acquire the most from your ULIP investments. Note that ULIPs are financial instruments for both growth and protection and with the correct strategy, they can be robust constituents of your portfolio.