Unit-Linked Insurance Policies or ULIPs are insurance policies that offer the potential of wealth creation as well as security of life cover. In this, the insurance company puts a portion of the investment towards life insurance and the rest into a fund that is based on equity or debt or both.
Since ULIP investment is not very diversified, the risk is probably a bit high compared to schemes like Equity Linked Saving Scheme (ELSS), say experts.
However, the risk associated may depend on the fund type attached to the plan.
In the words of Rakesh Goyal, Director Probus Insurance, Insurtech Broking Company, "If the premium paid towards this plan is invested in the equity market, then the risk would be on the higher end. If the premiums are balanced between equity and debt, then the risk for investors is minimized.
And finally, if the premium is invested in debt instruments, then there is a chance of lower risk with low return."
The allocation varies from insurer to insurer.
In the case of equity investments, the risk of fluctuation due to market volatility is to be ensured by the policyholders.
According to BankBazaar, it is always better to keep the insurance and investments separate.
"Once somebody starts a ULIP, they are required to pay a premium every year till the defined premium paying term. Secondly, sometimes ULIP may fail in both—generating good returns and offering adequate insurance cover. Also, these plans are very expensive,” they opine.
Compared to other endowment plans, ULIPs are, however, more transparent products in terms of how the money is being invested and what charges are being deducted.
ULIPs have a variety of charges that include allocation charge, policy admin charge, mortality charge and fund management charge.
"Investment portfolio can have up to 100 percent exposure in equities, over the long-term, ULIPs sometimes may help investors in building a decent corpus. However, in terms of providing insurance cover, most ULIPs do not offer life cover more than 25 times the annual premium," adds BankBazaar.
This saving cum protection plan, hence, needs to be studied well before investing as the funds are based on the stock market investment, and hence the ROI varies depending on the fluctuation in the market.
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