A unit link insurance plan offers dual advantages of life insurance to offer financial protection to your loved ones in the face of an eventuality and investment to meet your long-term goals. Likewise, the premium payments are split into two parts. Here are the mistakes to avoid when you purchase a ULIP plan.
Table of Contents
Opting for the Wrong Plan
A unit link insurance plan allows you to choose a plan based on your risk appetite and required returns. If you want substantial returns and have a high risk appetite, you can consider investing in an equity-oriented plan. Otherwise, you can look at a predominantly debt plan or a pure debt plan. Several people pick the wrong plan without realising it. So, it is best to speak to the insurer’s team to understand if the chosen plan suits your return needs and risk tolerance.
Not Knowing the Purpose of ULIPs
Consider why you want to buy a ULIP policy. If you only need insurance coverage, you can go for a term plan. If you want an appreciating investment, it is better to opt for an equity fund. You must seek a unit-linked insurance policy when you want to both invest and have an insurance cover in one plan for convenience.
Choosing a Single Premium Plan
Most unit link insurance plans allow you to choose between a regular investment plan and a single premium plan. Your regular investments can be monthly, quarterly, half-yearly or annual. You can pick your timing depending on your cash flows. A single premium doesn’t have the advantage of rupee cost averaging, particularly if you invest at higher market levels. A regular plan allows you to spread your tax savings across more years. For all these reasons, it is better not to choose a single premium plan unless you go for a pure debt plan.
Not Understanding the Switching Option in ULIPs
Say, you have chosen a debt plan. You can still change your decision if you wish to switch, for instance, to an equity plan. A ULIP policy allows you to switch between plans devoid of tax implications. However, make sure not to be fickle much and be patient with your investments.
Thinking of a ULIP Plan as a Guaranteed Investment Avenue
With US-64, schemes with guaranteed returns died in 1998. This is when stock market investors learnt that assured investing is not possible anymore. If you invest your unit link insurance plan in the equity market, you need to bear a high risk like that of any equity fund. In short, be clear that these plans come with investment-related risks. Although equities have the potential to perform better than other asset categories in the long term, you cannot expect assured positive returns from your plan.
Another common mistake is ignoring the costs involved. Invisible and visible loads are there in a ULIP plan. So, it is important to read the fine print to know about all the costs you are expected to incur while investing in the plan.
Also Read: How Using Payday Loans Without Getting Used