Buying ULIP for the First Time? Here are 5 Things You Should Know

If you are an amateur investor and are purchasing a ULIP for the first time, some of the most important things you should know are discussed in this post.

Unit Linked Insurance Plans, popularly known as ULIPs, are an excellent choice of investment for those who are looking for a combination of life insurance and investment. The premium that you pay for ULIP gets divided into purchasing life insurance coverage and investing in the funds you have selected. You get to switch between funds, partially withdraw your investment, and avail tax benefits.

But with so many insurance providers now offering ULIPs, it is not always easy for someone new to pick the best as per their requirement. First-time buyers can focus on these five things to make a ULIP purchase decision-

  1. Insurance Coverage Offered

To start with, you should understand that ULIP is first an insurance product and then an investment product. The main goal of purchasing ULIP is having financial protection for your family in case of your demise. So, the first thing you should know about is the maximum coverage offered in the plan.

With most plans, your nominee is paid the higher of the fund value, assured sum, or 105% of the paid premiums. Try to understand the current and future financial needs of your family so that you select a coverage amount that would be adequate for them when you are not around anymore.

  1. Fund Performance

With ULIPs, you get to choose from equity, debt, and balanced funds. While the performance history is in no way related to what the fund might deliver in the future, it does help you understand how good or bad a fund is. Funds with consistent performance history are generally known to be a wise choice.

Also, make sure that you first know your risk appetite when making the decision. The risk level varies significantly between equity, debt, and hybrid funds. Equity funds are known to be the riskiest, debt funds the least risky, and risk level of balanced funds is generally between equity and debt funds.

  1. Switching Between Funds

Once you have invested in ULIP, you also get the option to switch between the funds offered by the insurance provider. The switch can be due to the fluctuating market conditions or because of your personal financial health. Know that most funds only have a limited number of yearly free switches.

There is a switching fee beyond this limit. So, do check the free switches available in the fund you select and what is the switching fee.

  1. Additional Charges

There are also some additional charges that you are required to pay when you invest in ULIP. Some of the common ones are policy administration charges, premium allocation charges, mortality charges, fund management charges, and more.

Focus on the quantum of these additional charges because they can considerably impact the amount that actually gets invested in the fund, which could lead to lower returns.

  1. Tax Benefit

As ULIP is a life insurance policy, the premiums you pay for it are eligible for tax deductions under Section 80C of the IT Act up to Rs. 1.5 lakhs in a year. Even the maturity amount received from ULIP is exempt from tax under Section 10(10D).

However, you are required to remain invested in ULIP for at least five years to get these tax benefits. Any ULIP terminated before this lock-in period of 5 years would result in a reversal of tax deduction availed.

Time to Invest in ULIP

Check out some of the best ULIP Plans of 2019 but make sure you consider these points before buying your favourite ULIP. While some of these things might look confusing at first, spend some time researching them on the internet, and you are sure to understand them better.

Alternatively, you can always get in touch with a reputed insurance provider to get detailed answers your queries.