Everything you want to know about ULIPs

Recent Developments in the Regulation of ULIPs demand that the lock in period is increased from 3 years to 5 years and that the investor must continue paying the regular premium until maturity.

May 12, 2016 03:05 IST India Infoline News Service

Unit Linked Insurance Plans (ULIPs) as the name suggests are market-linked life insurance plans that offer a good mix of both investment (wealth creation) and financial protection through life insurance. As ingenious as it sounds, like all other financial planning decisions, carefully consider before making your way the ULIP way.

Before investing, what you must know about ULIPs? Different investors have varied financial goals; ULIPs are in no way a one-size-fit all product. Therefore, before you settle on investing through ULIPs, do examine the following points:

Suitability of hybrid approach to your requirements
If you invest in various mutual funds and thus determine the ones that suit your requirements, ULIPs might not be the ideal alternative for you. Choose the right mutual fund; the only way to achieve this is to delve deeper and examine the details carefully before getting started with an investment. Several factors such as risk-adjusted return from a mutual fund need to be evaluated; merely evaluating returns per se won’t suffice.

Personal commitment to make regular payment towards your investments is essential when investing in mutual funds. Lack of investment discipline could provide opportunities to divert the savings to other more “pressing” needs, therefore jeopardizing long-term goals.

The Financial Protection Aspect of ULIP should also be carefully considered. The amount paid up regularly in a ULIP is further bombarded by charges which include: premium allocation charges, administration charges, and fund management charges. Although these are amortized in the early years of the ULIP, the effect on the financial protection is evident. A much smaller portion is allocated to the life insurance premium resulting in a much smaller corpus in the initial years compared to a term plan. However, considering that the investment is made with financial goals in mind. A lump sum payment of the death benefit to your beneficiaries may not be ideal to meet the intended goals.  Features such as waiver of premium, are helpful in this case, to ensure the intended goals are fulfilled.

Recent Developments in the Regulation of ULIPs demand that the lock in period is increased from 3 years to 5 years and that the investor must continue paying the regular premium until maturity. Regulations have also favored long term ULIPs by capping charges for ULIPs with a term less than 10 years at 3% as compared to ULIPs which have terms exceeding 10 years at 2.25%.  These regulations, coupled with the complexity of shifting from one ULIP to another, as compared to the flexibility of shifting between mutual funds, make ULIPs have a more long term tang as an investment avenue.

Investing through ULIPs provides a fantastic combo for investors to enjoy wealth creation and benefit from financial protection. It also develops a strong investment culture since buyers are compelled to continue paying premiums. A good self-evaluation of where you are as an investor against your goals is essential to know if ULIPs are suitable for you.

The one skill that makes a successful investor
Several financial investment advice channels and publications focus on the acquisition of the right assets and management of a portfolio to increase the value. While this is crucial to the resultant of successful investments, all gains made on the portfolio value would amount to nothing with a wrong exit strategy. Knowing when to exit your investment is just as important as the process of buying and it plays a key role in determining whether the investor reports a net gain in portfolio value or loss.  Here is how to apply this one skill to become a successful investor.

Have Goal Centered Investments
The objective of every investment is to accrue the value of a portfolio to the desired amount. This is unlike trading where the objective is to book profits. Smart investors attach a goal to every investment made. The goals may vary between investors and also within an investor. The differences in goals are evident in their: holding period, demand for liquidity and risk appetite or need for capital protection. It is difficult to time markets thus smart investment calls for the pre-determination and fixing of the holding period of a portfolio. Through this, the investor is able to review the investment with no fears over short-term volatilities. The holding duration also determines which asset class to invest in and in what proportions thus helping you to manage risks. At the end of this holding period, and having attained the financial goal, it is important to objectively sell off the assets at this time.

Rebalance Your Portfolio
In order to optimize returns and manage risks, re-balancing of your portfolio is an important exercise to engage in actively. Frequent review of your portfolio performance to weed out underperformers and re-balancing the portfolio according to a recommended asset allocation helps to keep the focus on the targeted portfolio value thus you will know when to exit your investment. This also gives you a firm control over your portfolio over when to sell your assets.

An asset sale is considered a bad sale whenever it is guided by emotion, speculation or “expert opinion” popularly expressed in the media. Don't sell to just exploit on the returns, rather, emphasize on the objective for selling; that is goal achievements in time and valuation. Knowing when to sell is the one skill that makes successful investors.

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