Avoid 8 Grave Mistakes When Buying A ULIP Policy

Everyone has different priorities and financial goals to accomplish. To fulfil them without any financial difficulty, people find different solutions, like saving money, investing in different investment vehicles, etc. Often, people get confused while choosing an appropriate insurance policy for themselves.

Usually, people prefer to choose an investment option with lower risk, maximum benefits and broader coverage. A life insurance product with all these traits is a ULIP Policy. It provides life coverage and investment benefit from the market linked assets.

If you sign up for a ULIP policy in India, you will be eligible for a number of benefits. Find below a few of them:

• Life insurance cover plus investment benefit
• Fund Switching Option
• Withdrawal Facility (After the lock-in period ends)
• Tax Benefits (On investment, accumulation and withdrawal)
• Offers Liquidity
• Goal-based Planning (Retirement Planning, Child’s education, wealth creation)

Due to these benefits, the number of people buying a ULIP policy has increased. But, in the process, a few of them might commit mistakes, which might cost you a considerable amount.

Common Mistakes To Avoid When Buying ULIPs

Find below the common mistakes you should avoid while buying a ULIP policy.

1. Investing Only for Insurance Cover

Sometimes, people think of a ULIP policy as an alternative to a life insurance product. In contrast, a ULIP policy is different from a common life insurance policy. It covers a number of investment benefits along with life insurance coverage.

It is also one of the top monthly income schemes. If you stop paying the premium due to any reason, you will not be eligible for the insurance benefit.

1. Opting For Single Premium Plan

It is comparatively beneficial to buy an insurance plan with regular premium payments rather than a single premium payment plan. Depending on your cash flows, you can decide the frequency of your premium payment, such as monthly, quarterly, half-yearly, etc. Opting for this spreads your tax benefits and provides you with the benefit of rupee cost averaging.

1. Not Taking Into Account Your Goals And Objective

Every individual has different goals and objectives. Before investing in a life insurance product, it is important to assess your long term and short term goals and to calculate your current assets and liabilities.

After analyzing and evaluating everything, you will be able to get a fair idea about the fund requirement to accomplish your goals and fight the uncertainties that might arise in the future.

1. Stay Invested For The Long Term

Not staying invested for the long run is one of the most common mistakes committed by people. If you stop paying the premium during the tenure of the policy, you will not be eligible for life coverage.

Also, if you fail to pay the premium amount during the first five years, i.e., the lock-in period, you will not be able to withdraw your amount. In this case, you will just receive the assets’ net value at the end of 5 years after the deduction of certain charges.

1. Not Taking Into Account Your Risk Exposure

It is essential to consider the risk factor of a ULIP Policy. As ULIPs are market-linked securities, it means you are eligible for higher returns, along with being exposed to higher risk. However, it is advised to allocate your funds wisely based on your risk appetite and current financial capacity.

Initially, you can choose either equity or debt as per your preference. Later, you can switch your funds among the securities depending on the market condition. Though, a fixed number of switches are allowed in a year. This number might vary across different insurance providers.

1. Not Taking Into Account The Associated ULIP Charges

There are several charges associated with a ULIP policy, such as policy administration charges, premium allocation charges, fund management and administration charges, etc. After the new guidelines issued by the Insurance Regulatory and Development Authority of India, the insurance providers have now reduced these charges and capped them at 3%.

However, these charges vary across different insurance providers. Therefore, before making your final decision, it is essential to check these charges and choose one with  lower charges while considering other benefits and inclusions.

1. Opting For Single Premium Plan

It is comparatively beneficial to buy an insurance plan with regular premium payments rather than a single premium payment plan. Depending on your cash flows, you can decide the frequency of your premium payment, such as monthly, quarterly, half-yearly, etc. Opting for this spreads your tax benefits and provides you with the benefit of rupee cost averaging.

1. Treating ULIP As A Five-Year Investment

It is important to keep in mind that a ULIP policy has a lock-in period of 5 years, and it is not a 5-year investment plan. If there is no urgency, it is advisable to continue your ULIP policy for more number of years.

The withdrawal facility provided after the lock-in period is for your comfort and liquidity, such that you can withdraw the amount in case of an emergency. Having your amount invested for a longer period will provide you with more benefits.

Apart from the mistakes mentioned above, one of the most critical mistakes you might commit is choosing an inappropriate insurance provider.

Therefore, it is advisable to check through the insurance provider’s profile and read through all the specifications, terms and conditions, the record of claim settlement ratio, the associated charges etc., to avoid any issues later. In case you face any difficulty throughout the process, you can reach out to customer care executives.