A traditional family considers a life insurance policy as a secure ‘investment’. People launching their careers begin by taking that first step and buying a life insurance policy to secure the future of their family. There are plenty of options in the market for this.
There are traditional term plans that offer a sum assured to the nominee or the policyholder’s family in case they were to pass away. The other option is to get a life insurance policy with survival or maturity benefits. There are also money-back policies that pay a part of the maturity amount in periodic portions and whole life policies where the maturity amount is paid to the policyholder as a lump sum amount.
But in most cases, standalone life insurance policies only offer a significant death benefit, and the maturity benefits are not substantial enough to consider them to be traditional investments. In some cases, there is a need for a large maturity amount that policyholders can fall back on for a comfortable future in case they survive the entire term of the insurance. This need can be fulfilled by ULIP insurance.
This type of life insurance has two sides to it, and the premium paid is divided into two components. The first component resembles ordinary term insurance, where there is a sum assured that is given to the policyholder’s family in the unfortunate event of their death. This is known as the death clause though modern plans let you add a rider for major illnesses and severe crippling accidents. Financial assistance in case of critical illness is provided to the policyholder or their family members. The second component of ULIP insurance is the element of investing in market-linked entities. In this plan, the second component of the premium is paid annually and is invested in different funds such as equity funds, debt funds, and balanced funds.
The investor gets to decide the sum and the fund in which the money is to be invested. ULIP insurance has a good provision for customers in the form of the ULIP calculator.
A ULIP calculator is an advanced version of the EMI calculator of a loan and lets prospective investors try out different combinations of fund investments, different tenures, and premium amounts. The ULIP calculator will display different maturity amounts for different investment patterns, and investors are allowed to try out different patterns of investment simulation.
Earnings and profits are accumulated in the form of units, and wealth increases for the investors in terms of the number of units. Policyholders can start to redeem their units after the initial lock-in period of 5 years. The units have a value based on the NAV (Net Asset Value) prevailing during the time of redeeming.
There are three types of investment instruments, or mutual funds in ULIP insurance, and investors can select any of the following after trying out combinations using the ULIP calculator.
- Equity investments – These carry an element of risk though IRDA (Insurance Regulatory Development Association) has stipulated that investors must get a minimum return of 4.5% over a long-term ULIP plan.
- Low-risk funds such as debt funds, government securities, and bonds are low risk, and returns in the form of interest are guaranteed.
- Balanced funds are the most stable and offer the highest rewards. This type of ULIP plan balances the investment that goes to different funds. This plan alternates investment between high and low-risk funds and provides the best returns. Balanced funds operate on the same principle as the ULIP calculator, and this is a live version of the calculator where fund managers switch between different funds during fluctuating market conditions.
ULIP insurance is highly flexible and is separately planned with the following objectives:
- Retirement funds after a certain age – ULIP plans for this objective provide monthly pensions for investors by encashing and redeeming accumulated units.
- Education or marriage of children – These types of ULIP insurance are designed to redeem units in cash to coincide with the years in which children are to be married or whether they go for higher education. The ULIP calculator provides tips on how to invest for such funds to be available when required.
- Medical emergencies – ULIP insurance has evolved over the years. Several ULIP insurance plans provide term and medical insurance and a third component of the fund investment. Such combo policies are a great way to secure the entire family’s future.
Things to watch out for a while buying ULIP insurance
While the ULIP calculator provides a good idea of how ULIP insurance works, investors need to check the following things before buying ULIP insurance.
- The first thing to be checked is the past performance of the ULIP plan and how much NAV has been given to past ULIP plan holders. The best choice would obviously be a particular ULIP plan with the best performance, highest returns, and consistent high records that new investors can rely on.
- The key to the growth of a ULIP insurance fund is the transparency and the need for multiple switches between different funds as stock market conditions fluctuate. There is also a trend of people wishing to invest in low-risk funds as they grow older. Such policyholders often ask for a switch to debt funds to reduce the amount of risk and still provide consistent returns.
People need to secure their future and that of their families. A reliable ULIP insurance that has been thoroughly checked will be the greatest gift that a family can give themselves.
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