In recent years ULIPs have gained huge popularity among many first-time investors. This is due to the fact that the policy provides you the benefit of investments along with the benefit of life insurance cover. If you are planning on investing in a ULIP for the first time, you will have many questions related to the policy. The most important question being – how do ULIPs work? To help you understand the working of the policy, more information is given below.
What is a ULIP?
ULIP is a type of life insurance policy in which you get the benefit of investment which is focused at helping you grow your wealth. The life insurance cover provides financial safety for your loved ones from different life risks. Premium that you pay for the policy is split into 2 parts. One part is used for providing life cover, the other part is used to invest in market funds, namely equity and debt funds. Based on what your life goals are and your risk appetite, you have the option of investing in either fund or both the funds. When you opt for long-term policy, the returns that you get could be much higher compared to the returns you get from a short-term policy.
How does the selection of a ULIP work?
Given below are the steps on how the selection of a ULIP policy works:
- Select the type of policy
Before you invest in ULIPs, you should have a clear idea about what your life goal is, how long it will take you to accomplish that life goal, and then you should plan your ULIP investment accordingly. Select the duration of the policy which would match your life goals. Then select the premium amount which would help you in achieving your life goal. Lastly, select the amount of life insurance cover that you want for your loved ones. Before you invest in ULIPs, you should use the ULIP calculator that you can find on any insurance website to get a better idea.
- Select your premium payment method
Once you have selected the duration of the policy and all the other essentials of the policy, select what will be the payment frequency of the premium. You could either opt for a monthly premium, quarterly premium, yearly premium; if you can manage the finances, you can also pay the premium in a lump sum amount. Then select how you want the pay outs of the policy to be. This too can be either in monthly mode, quarterly mode, yearly mode, or in lump sum mode.
- Select your fund type
One part of the premium is used to invest in market funds. Based on what your requirement is, you could either opt to invest in just an equity fund or debt fund or you could invest in both. Equity funds invest in stocks of companies that are market-listed. Although you get good returns when you invest in equity funds, the risk is also higher. Alternatively, you can invest in debt funds. Investments done in debt funds are done in government securities and bonds, and other types of cash and liquid markets. Debt funds have a lower risk factor, and they offer low to medium returns. You can invest in both the funds at the same time to balance your returns and risk factor. You have the option of switching your investments based on your risk appetite at any point of time. Essentially in switching, you can reallocate your investments from one fund to another to gain consistent returns. To see how your returns would be, use the ULIP calculator.
- Opt for a fund manager
Most investors of ULIPs tend to hire fund manager as they are either confused or get scared in managing their own funds. The services of a fund manager are provided by your insurer. The fund manager basically handles your investments based on the instructions given by you. While this is smart choice as they make informed and educated decisions, you are charged a fee for availing the fund management services provided by the insurer.
Once you follow the steps, the money that you have invested in the funds will get returns based on the market situation. Investing for a long term is much more beneficial in a ULIP, meaning, the returns are much higher and can help you in accomplishing life goals.