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Need assistance in choosing the right insurance plan? Get a call from our Expert.

Need assistance in choosing the right insurance plan?Get a call from our Expert.

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Are Unit Linked Insurance Plans Risky?

Despite their array of benefits, ULIP# plans are frequently misunderstood financial products, commonly perceived as risky due to their investment nature. However, the investment risks linked with ULIPs do not depend on a single kind of fund option.
 

As an investor looking to expand your investment plans, there is currently an abundance of options available. Some carry a higher level of risk, while others provide more assured returns. 
 

All things considered, investors who often look out for plans that encompass both of the aforementioned aspects often consider ULIP# funds. However, is ULIP safe as an investment choice?

What is ULIP Insurance?

The acronym ULIP stands for Unit Linked Insurance Plan. ULIPs is a life insurance product that combines the advantages of capital growth and life insurance coverage. 
 

ULIP stands out as one of the preferred financial products in the market. It serves many objectives, such as offering life insurance coverage, wealth accumulation, creating retirement income, and funding the educational expenses of children and grandchildren. 
 

ULIP policyholders are required to make regular premium payments, which serve the dual purpose of covering insurance and contributing to investments. 
 

Frequently, people purchase ULIP insurance with the intention of benefiting their heirs. In the case of a life insurance ULIP, the designated beneficiaries would receive payouts upon the owner's demise.

Types of Funds in ULIPs

The potential investment risks linked with ULIPs do not depend on a single kind of fund option. It is a mixture of the combined risk level of the fund types that you decide to invest in. 
 

  1. Equity Funds

    Equity funds are high-risk investments and include investments such as buying shares of companies. The change in the stock market directly influences the prices of the share, and hence, equity funds are suitable for investors willing to take higher risks. 
     

  2. Debt Funds

    These funds, also referred to as bond and income funds, carry a moderate level of risk and primarily invest in fixed-income and debt instruments such as corporate bonds, government bonds, and securities. 
     

    They usually have a medium level of reward potential and an equity exposure ranging from 20% to 70%.
     

  3. Balanced Fund

    This is the most stable and preferred type of ULIP, blending equity instruments like company stocks with fixed-income instruments like bonds, resulting in a medium to high-risk profile. 
     

    Unlike the previous two options, a balanced fund focuses more on insurance and systematic wealth creation, with pre-defined limits for equity and debt investments, typically in a 50:50 ratio.
     

  4. Liquidity Funds

    Liquidity funds are low-risk in nature as they prioritise short-term market components such as bank deposits, commercial papers, and treasury bills. 
     

    These funds  are suitable for individuals who are unwilling to take risks with their money in equities or bonds.

Why are Investment Risks Necessary?

ULIPs is a popular choice due to their flexibility, allowing investors to adjust their investment preferences throughout their investment. For example, you have the option to switch between equity funds, debt funds, and liquidity funds based on their specific investment objectives.
 

When choosing an investment, you are likely to think about two key factors: the level of risk associated with the investment and the anticipated returns from the investment.
 

It is commonly believed that there exists a direct correlation between the potential risk and the return on any investment. The greater the potential for returns, the higher the associated risk.
 

This is precisely why safer investments, characterised by minimal risk, such as government bonds, tend to yield moderate to low returns. On the other hand, highly risky investments have the potential to provide very enticing returns.
 

How to Manage Risk in ULIP Plans? 

The top-most discussed strategies to manage the ULIP risks in the volatile market are fund switching, automated portfolio balancing, and systematic investment.
 

  1. Fund Switching

    This strategy allows you to protect your investments from market fluctuations and increase returns by balancing your investment portfolio between debt and equity. 
     

    For example, if you foresee a dip in the stock market, you must switch a large portion of your investment to debt/liquid funds, and switch them back to equity.
     

  2. Automated Portfolio Balancing

    Let us say you have an investment portfolio with an equal distribution of both Debt and Equity. However, market fluctuations can alter this ratio, potentially increasing or decreasing your risk exposure.
     

    For example, if you first opted for a 50:50 ratio for your portfolio, but due to market dynamics, that ratio has shifted to 70:30, the system will automatically carry out the purchase and sale of securities to restore the original 50:50 allocation you desired.
     

  3. Systematic Investment 

    Systematic investing refers to consistently and periodically adding funds to your investment account or a particular asset. 
     

    When you are investing in an equity fund, consistently contributing a fixed amount can effectively lower your investment risk. This approach mitigates the impact of stock market fluctuations and aids in reducing your average investment unit cost.

Final Verdict

A Unit Linked Insurance plan combines insurance coverage with investment opportunities. It is generally recognised as one of the top saving and investment instruments, enabling you to optimise your investment returns.
 

Overall, when contemplating market-linked2 investments, it is crucial to time the market accurately. Tata AIA ULIP Insurance serves as an excellent investment tool that offers life coverage and provides tax* benefits. 
 

Generally, ULIPs encompass various fund options, spanning from equities to bonds. Depending on your risk tolerance and informed market analysis, you must devise an investment strategy.

Get Flexibility to Choose from 10+ Fund Options with our ULIP

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions (FAQs)

Who bears the investment risk in the ULIP plan?

In Unit Linked Insurance Plans (ULIP), the investments made are subject to risks associated with the capital markets. This investment risk in the investment portfolio is borne by the policyholder. Thus, you should make your investment choice after considering your risk appetite and needs.

What are the risks of unit linked insurance?

ULIPs make investments in debt and equity securities, both of which are exposed to market risks. There is no assurance of returns, and the investment's value may change based on market conditions. Nonetheless, when employed correctly, ULIPs can help optimise your returns.

Is ULIP a good investment?

ULIPs prove advantageous if you aim to gather funds for long-term goals, as they tend to yield lower returns in the short term due to market volatility. However, over the long haul, they often yield highly appealing market-linked returns.

What is the minimum period for ULIP?

The minimum lock-in period for a Unit Linked Insurance Plan (ULIP) is 5 years, meaning that if the policyholder decides to terminate the policy, the funds will be moved to discontinued policy funds.

Can I make a withdrawal from my ULIP after three years?

Withdrawals from ULIPs are not permitted within the initial five-year lock-in period. Nevertheless, you have the option to surrender your policy during this period. 

Once you surrender or discontinue the plan, you must wait until the lock-in period concludes to receive the corresponding amount.

Disclaimers

  •  Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  •  Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.

  • 2Market-linked returns are subject to market risks and terms & conditions of the product. The assumed rate of returns or illustrated amount may not be guaranteed and depends on market fluctuations.

  • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER

  • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.

  • Past performance is not indicative of future performance.

  • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.

  • Please make your own independent decision after consulting your financial or other professional advisor.