ULIPs or unit linked insurance plans are very common and popular insurance tools. They allow you to invest as well as build up an insurance fund. However there is a very strong risk factor associated with ULIPs and you must only invest in them when you are well aware of the risks. Agents often mislead unsuspecting customers into buying ULIPs without explaining the risks involved.
If you are looking to buy a ULIP, you must make a thorough evaluation beforehand. You need to evaluate your own finances, and you need to evaluate the ULIPs and what returns they have on offer. To correctly evaluate a ULIP before buying it, you must keep the following in mind:
1. ULIPs have different funds: When investing in a ULIP, you have four basic funds to choose from. These funds are the equity funds, income/fixed interest/bond funds, cash funds and balance funds. In equity funds, your money is invested in company equities. The risk factor is the highest here. In income/fixed interest/bond funds, the premium amount is invested in bonds and fixed income tools like government securities. This is of medium risk. In cash funds, the amount is directly invested in cash components like bank deposits. This is the least risky ULIP fund. Finally, in a balance fund, the amount is invested in bonds as well as in fixed securities. This too is of medium risk.
2. Draw up a risk profile: Before you invest in a ULIP, you need to draw up a risk profile for yourself. How much risk are you willing to take? If you are a risk-taker and want to invest for a longer time, then prepare yourself for the minor losses that you might incur as you go along. If you are young and financially strong, go for equity bonds. All in all, you must know beforehand what kind of risk you are willing to take as this will help you pick the correct ULIP.
3. Evaluate your own needs: Do you urgently require insurance cover? Is investment the only thing on your mind? Can you afford to invest in a fund that can bring in losses? You need to answer these questions truthfully before you buy a ULIP. If insurance cover is your top priority, then you would be better off with a traditional insurance plan. If you have enough insurance cover and need no more, you would gain from investing in a mutual fund. So you need to be clear about what you need and only then can you effectively buy the perfect ULIP.
4. Compare the various ULIPs: You must have heard this statement many, many times. Cliched as it may sound, you still need to compare the various ULIPs before buying them. Do not blindly buy a plan just because your brother bought it. Always remember that needs and requirements vary from person to person. So go through the features of the different ULIPs and only then purchase the one most suited for you.
Evaluation of a ULIP is very important as only with proper evaluation can you understand the worthiness of the ULIP. So go through the points mentioned above before you purchase a ULIP so that your profits are maximized and your risks are minimized. Good luck!
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may write to the author at Deepak@myinsuranceclub.com