How Can You Choose a ULIP Plan Suitable to Your Portfolio?

A Unit Linked Insurance Plan combines both life insurance and investment in market-linked funds. When paying the premium, a certain amount provides life cover, while the rest of the amount is invested in funds of your choice, depending on your risk appetite and financial needs. ULIPs allow selecting equity-based funds for higher risk tolerance, debt-based funds for stability, or hybrid funds that balance both components. This makes ULIPs suitable for those who not only want to protect their loved ones but also generate wealth over time. This article explores the key factors on how to choose the best ULIP plan for your investment portfolio.

How to select a suitable ULIP policy?

In ULIPs, you must pay premiums like any other life insurance product. However, a part of the premium is allocated to providing life coverage, while the remaining premium is invested in the market-linked¹ funds to generate returns. So, consider the following before you select a plan are mentioned below.

Risk appetite

One of the things you need to consider while choosing a ULIP policy is your risk-taking capacity. When you are young, your ability to take risks is greater. However, the risk-taking capacity decreases when you have dependants. Age-related risks and illnesses also affect the risk-taking capacity of an individual. Therefore, it is essential to understand your risk profile before choosing a ULIP plan.

Equity-based funds may be a suitable option for people who have a higher risk appetite. Insurers offer multiple funds to choose from, and you can choose the investment option that suits you. Before choosing a ULIP, the policyholder must check if the insurer allows them to switch funds in case they wish to. With this option, you can switch funds if the market conditions are unfavourable and do not align with your financial goals.

Personal investment goals

You need to define your financial and life goals before making any investment decisions. Life goals can include buying a house, marriage, child education, etc. Understanding and evaluating your goals is thus important before choosing a plan for yourself.

Unit-linked insurance plans help to provide financial safety cover to your family in case of any unforeseen incident or death. They also provide you with various avenues whereby you can create wealth by investing and earning market-linked¹ returns. Therefore, before choosing a plan, you need to make wise investment decisions and study your risk appetite and goals.

Now, let’s see some tips to choose the best ULIP plan and what to keep in mind.

Important parameters to keep in mind while choosing a ULIP policy

Several factors must be considered when selecting a ULIP to ensure the plan suits your needs and benefits your financial portfolio.
 

Determine the risk

Understanding risk is the first step to investing in any market-linked product. A proper understanding of the risk profile will ensure that your ULIP portfolio is rightly distributed between equity funds, which are riskier and carry growth potential, and debt funds, which are stable and offer moderate return. The selection of funds should match your capacity to handle volatility, and your chosen funds must be aligned with your risk tolerance and investment horizon.
 

Evaluate the life coverage

Life cover plays an important role in ULIPs, whereby a part of the premium offers life cover, providing financial security to your family in case of an unfortunate event. You will need to assess whether the death benefit aligns with the needs of your family, which may be based on your income, outstanding loans, future expenses, and number of dependants. Sufficient coverage gives you peace of mind and keeps your investment goals on course.
 

Analyse different plans

Different insurers offer varied ULIP features and benefits, making it important to compare multiple plans before making a decision. Check fund options, fees, flexibility features, and past performance, along with using an online ULIP calculator to estimate premiums and possible returns in various scenarios. Look at the track record of the fund management team and the reputation of the insurer to know which features matter most in your case.
 

Identify your investment objectives

Your ULIP choice is dictated by certain investment objectives, such as the education of your children, retirement planning, or building wealth. Every goal has a different strategy and investment timeline. The equity exposure can be more if the time duration is long. If the duration is short, one may consider more reliable fund choices. Having well-defined goals helps in staying focused and facilitates efficient monitoring of your progress.
 

Tax benefits

ULIPs offer tax² advantages where premiums paid qualify for deduction under Section 80C of the Income Tax Act, 1961, provided the annual premium does not exceed 10% of the sum assured. Death benefits received under ULIPs are typically tax-exempt under Section 10(10D), making these plans efficient for long-term financial planning. However, ULIP benefits should complement your primary objectives rather than being the sole reason for investment and consulting a tax advisor can help you understand how ULIP benefits apply to your specific situation.
 

ULIP charges

ULIPs involve various charges that affect your returns, with fund managers deducting charges under categories including premium allocation, fund management, policy administration, and fund switching. These charges are deducted from your premium, which results in fewer units being allocated to your fund account, with premium allocation charges typically higher in early policy years and reducing over time. Understanding the charge structure helps you compare plans effectively, as some insurers offer plans with lower charges that can improve long-term returns.

Eligibility criteria to buy ULIPs

There are specific eligibility requirements for ULIPs, which differ with different insurers and types of plans. Some of the common factors determining eligibility to buy ULIPs are:

• Age: The minimum entry age is usually 18 years. However, a few child plans allow the minimum entry age to be below this with parental consent. Maximum entry age can be 60-65 years, depending on the policy term.
• Premium requirements: Minimum premium amounts vary among plans. Regular premium ULIPs may require annual premiums as low as Rs. 12,000 to Rs. 24,000, while single premium plans often have higher minimum amounts.
• Sum assured: The sum assured is typically calculated as a multiple of the annual premium based on regulatory requirements.
• Medical requirements: There are usually simple medical questionnaires, but medical tests depend on the amount of coverage desired and your age.
• Documentation: Generally, income proof and identity documents are required. Some plans have minimum income criteria to ensure the premium is not a burden.
• Verification: Check specific eligibility conditions with your insurer before applying, as the requirements may vary by plan type.

Common mistakes to avoid while choosing a ULIP plan

Following are some of the common mistakes that you should avoid while choosing a ULIP:

• Focusing only on projected returns: Comparing plans by focusing solely on projected returns, without realising the assumptions behind those projections, can lead to unrealistic expectations.
• Ignoring charge structure: The higher the charge, the lower the amount invested, which impacts long-term returns, so carefully review the complete charge structure.
• Mismatching policy term: Not matching the policy term with your investment goal may lead to lower returns due to surrender charges from early surrender of a ULIP.
• Inadequate life coverage: Giving more importance to investment allocation than to the adequacy of life coverage may leave your family underinsured.
• Not reviewing periodically: By not reviewing and rebalancing your fund allocation periodically, you might lose an opportunity to optimise returns with regard to changing market conditions.
• Skipping policy terms: Not reading through the policy terms properly may cause problems in the future regarding specific conditions, exclusions, or restrictions.
• Wrong selection of fund: Selection of funds without understanding your risk profile may increase the chances of risk during market volatility.
• Not utilising fund switching: Not using the fund switching option when needed can affect portfolio performance during changing market conditions.
   

Conclusion

Understanding your financial objectives, risk tolerance, and investment timeline is crucial in choosing the right ULIP plan. Life coverage, market growth potential, flexibility, and the option of tax² benefits make ULIPs a suitable option for long-term financial planning goals. Some other factors to consider are fund options, charges, adequacy of coverage, and insurer reputation. A well-considered ULIP portfolio strategy helps you work towards your financial goals while keeping your family's future safe.