Dos and don’ts to remember before investing in ULIPs

Confused about whether to invest in ULIPs or not. Don’t worry, we have got your sorted. This article is all about what you have to do and don’t while investing in ULIPs.

What is ULIP?

Unit Linked Insurance Plan (ULIP) is an insurance plan that provides both investments to help you achieve your long-term goals and life insurance to financially protect your family in the event of tragic demise. The premium for a ULIP is split into two parts; that is, a portion of it goes toward your life insurance, and the rest is invested in the fund of your choice.

Depending on your risk tolerance and goals, you can invest in equity, debt, or a combination. As a result, ULIP plans are an excellent long-term investment option for you and your family. So, if you are thinking of ULIP insurance, there are some dos and don’ts that you should remember before buying the insurance.

Here are some Dos and Don’ts-

  • ULIP plans offer a variety of investment options

Depending on their risk tolerance, ULIP policyholders can choose to invest their premium in either equity or debt, or even a combination of the two. Someone who is willing to take on a high level of risk can invest in equity funds through ULIPs, whereas someone who is more cautious can invest in mutual funds.

  • Transaction fees are no longer included in newer ULIP plans

ULIP plans are a smart and secure way to begin investing. Older policies, on the other hand, still have a number of transaction fees associated with premium allocation, mortality change, and fund management. Before you invest, make sure the policy is newer and eliminates these fees after a few years.

  • Re-balancing your allocation

Some products allow you to automatically rebalance your asset allocation as you get older. As the policy approaches maturity, the plan shifts asset allocation away from riskier assets and toward more conservative ones. Risk appetite typically decreases with age, so much a benefit could be critical.

  • Compare

Make an informed decision. Compare all products on the market based on parameters such as policy terms, benefits, and limitations. A low-cost structure should not be the only consideration when selecting a product. Examine why the price is lower and what advantages you are getting from the product. Examine the company’s fund management practice and how consistent their returns have been in the past. Examine the performance of all funds rather than just one. 

  • Investing merely for tax advantages

Section 80C of the Income-tax Act provides tax benefits for ULIPs. It is one of the investment products that are eligible for a tax deduction of up to Rs. 1.5 Lakh. However, if you only want the tax benefit, you should be aware that you cannot withdraw the invested amount from unit-linked insurance plans for a period of five years. If you withdraw money before 5 years, you must pay taxes on the amount received. As a result, you should only invest in ULIPs if you have a mid-to-long-term timeframe.

  • Payment of premiums is stopped.

You should not stop paying the premium, either immediately after the first payment or later. If you stop paying premiums on your ULIPs, you may not be able to withdraw the money until the 5-year lock-in period is over. If you stop paying your premium after the first year and withdraw the money after the lock-in period, you will be penalized based on the net asset value of your total investment over the next five years.

Make sure you follow these tips while investing in ULIPs for more effective results. Just make sure you calculate your other expenses and income sources while investing in ULIP.