The onset of the COVID-19 pandemic in 2020 taught us all a critical lesson – financial emergencies can occur anytime. It is important to have a sound financial plan that assures financial protection to your family even in your absence and allows you to accomplish your long-term goals.

You can secure your family’s financial needs by purchasing life insurance and accumulate wealth for long-term needs by investing in different investment schemes of your choice. However, what if you can accomplish both goals with a single investment? Enter Unit Linked Insurance Plan or ULIP. It is a hybrid financial instrument that allows you to meet both insurance and investment needs.

If you are keen on investing in a ULIP plan, then here are a few important things you must know about it so that you can make an informed purchase decision.

• Know about the charges involved

There are a few charges associated with ULIPs, including premium allocation charges, administration charges, mortality charges, fund switching charges, top-up charges, etc. However, not all insurance companies levy all these charges.

So, when you buy a ULIP, you must have a clear idea about the different charges levied by the insurer and their impact on the potential returns. Today, ULIPs tend to have lower charges, making them an attractive investment proposition for investors.

• Choose the optimum sum assured option

The sum assured is the lump sum amount that the insurer pays to the insured person’s family in the event of his/her unfortunate demise during the policy tenure. Typically, the sum assured is fixed at the time of buying the policy. 

So, if your primary objective of buying the policy is to give your family maximum financial protection during your absence, choose a policy with a high sum assured. Also, it is better to choose a policy that returns the mortality charges. This will ensure that your family receives a sufficient amount to take care of their expenses after you are gone.

• Assess your risk-taking capacity

As mentioned earlier, a portion of the ULIP premium is invested in money market instruments across asset classes like debt funds, equity funds, stocks, bonds, etc. So, you must know your risk-taking capacity and choose to invest in different funds accordingly. 

High-risk funds like equity funds offer excellent returns but at the same time carry high risk. In contrast, debt funds offer low and stable returns but the risk of losing money in such funds is relatively less. Stocks are high-risk investment options, too but offer excellent returns.

It is best advised to take a balanced approach and invest in both high-risk and low-risk funds.  

• Be wary of the lock-in period

ULIPs have a lock-in period of five years. This means you cannot withdraw the funds before the lock-in period ends. Consider this a blessing rather than a bane, as it allows you to continue investing for five years, and you can build a considerable corpus.

After five years, you can make partial withdrawals up to a certain limit. But it is better to avoid making such withdrawals unless it is an emergency, as it will have a significant impact on the overall returns after maturity.

• Leverage the tax benefits

ULIP is an investment option that has EEE (exempt-exempt-exempt) tax status. You can enjoy many tax benefits under different sections of the Indian Income Tax Act. The premium can be claimed for a tax deduction of up to ₹1.5 Lakh under Section 80C. Also, the money received after your demise or upon policy maturity is fully tax-exempt.

Final Word

ULIP is an excellent investment option that you must have in your portfolio. It can financially secure your family and help you meet your long-term goals.