Things you should know before investing in Ulip

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Insurance plans are for achieving long term goals. They are ideal for financial targets that are at least 7-10 years away considering they come with a long lock-in period and high surrender charges. Though Unit Linked Insurance Plans or Ulips have been standardised to an extent it is essential to understand their basic nature before signing up for one. Here is a checklist for you before buying a Ulip:

Lock-in period: Ulips come with a lock-in period of 5 years. This means that if you stop paying the premium before 5 years then your funds are moved to discontinuance funds. Discontinuance fund levies the fund management charge at 0.50% and offers a return of around 3-4%, depending on the current savings rate. After the completion of 5 years, you can withdraw funds from the discontinuance fund.

Before the premium amount is moved to the discontinuance fund, a policyholder also has to pay discontinuance charges. If the annual premium of a policy is more than Rs 25,000, then the charges vary from Rs 6,000-Rs 2000 depending on the policy year. For the amount less than Rs 25,000, it varies from Rs 1000-Rs 3000 based on the year policy got surrendered. If the policy gets discontinued in the fifth year then there are no surrender charges.

Considering the lock-in period of 5 years, it is advisable to invest in Ulips for attaining your long term goals. For short term goals, Ulips should be avoided.

Charge structure: Unlike endowment plans, the charge structure of ULIPs is transparent. The charges are deducted under four main heads – premium allocation charges, fund management charges, administration charges and mortality charges. According to IRDAI guidelines in 2010 ULIP charges are now capped at 3% of gross yield for policies with a term of up to 10 years and 2.25% for those with a term of more than 10 years.

Benefit illustration: All insurance policies come with a benefit illustration that shows a detailed calculation of how much maturity value you will get after the deduction of all charges at an assumed rate of 4% and 8%. Though the actual rate of return could be higher or lower than the assumed rate, the benefit illustration gives a good view of the net yield the policy offers. Hence, always ask your agent or check online the benefit illustration of the policy you want to buy.

Investment options: Many people think that unit-linked policies are all about equities. This is the wrong notion as Ulips offer a range of investment options varying from equities, debt, government securities to balanced fund. You can choose the option based on your risk profile and not necessarily deploy all your money into equities.

Plan Type: Often people buy Ulips under the notion that they have to pay a premium for a single year only. Before buying a plan you should always check the policy documents to be double sure about the premium payment tenure. If you invest wrongly then you won’t be able to withdraw the amount before the completion of 5 years.