A ULIP, or Unit Linked Insurance Plan, gives you life cover and market investing in one product. They want protection and savings together. But many buy without really knowing how the plan works. Let’s look at the common mistakes when investing, and how you can dodge them.
1. Overlooking Policy Charges
The plan comes with several charges. There’s a premium allocation charge, a fund management fee, an admin charge and a mortality charge. Some plans also charge you for switching funds once your free switches run out. These charges reduce the amount invested or the value of your accumulated fund.
How to avoid it: Read the benefit illustration and the brochure before you sign. Compare the total charges across plans, not just the returns on show. If a charge confuses you, ask the insurer to explain it. Newer plans often cost less than older ones, so check what’s on offer today.
2. Choosing Unsuitable Funds
You can pick from equity, debt and balanced funds. Think about it this way. A young person with 20 years ahead can handle more equity. Someone close to retirement needs more stability. The wrong fund can leave you taking too much risk, or earning too little.
How to avoid it: Match the fund to your goal, your time frame and how much risk you can stomach. Look at the fund’s record over several market cycles, not just one year. As life changes, use the switch option to rebalance.
3. Expecting Guaranteed Market Returns
It’s easy to assume that a ULIP offers fixed returns simply because an insurance company provides it. It’s not true. The value of your investment changes with the market. You’ll usually see returns illustrated at 4% and 8% in the policy documents, as prescribed by the regulator. These are just examples of how your investment might grow, not guaranteed returns.
How to avoid it: See the illustrated numbers as estimates, not promises. Stay invested for the long haul, so the ups and downs even out. And don’t judge your investment by one short fall in the NAV.
4. Surrendering the Policy Too Early
These plans have a five-year lock-in. If you stop within the lock-in, your policy turns discontinued. You get the money only after the lock-in ends, and the insurer may deduct discontinuance charges.
Exiting early can also change your tax position. Under current rules, tax depends on your annual premium and the policy terms.
How to avoid it: Pick a premium you can pay comfortably for the full term. If money gets tight, ask about reducing the premium instead of surrendering.
5. Ignoring the Policy Features
Many buyers overlook useful features such as partial withdrawals after the lock-in period, loyalty additions and premium redirection. There’s also a 30-day free-look period under IRDAI rules, which generally starts when you receive your policy document. If you read the terms and feel the policy isn’t right for you, you can ask to cancel it within this period. However, the amount refunded may be lower due to applicable deductions and, in the case of ULIPs, changes in the value of your units.
How to avoid it: Note the sum assured, the lock-in, the funds on offer and the exit terms. Choose a sum assured that truly protects your family, not just a token amount.
Final Thoughts
A ULIP can be a handy long-term tool when you know what you’re buying. Understand the charges and compare the plans carefully. If you have doubts, speak to a qualified financial adviser.
