Unit Linked Insurance Plans (ULIPs) were always seen as a 'wonder product' that simultaneously fulfilled an individual's needs for investment and insurance.
However, the recent downswings in the markets have forced investors to do a rethink. Very often it was poor selection that was responsible for the investors' woes. Here is a 5-step strategy for investing in ULIPs.
1. Understand the concept of ULIPs
Try to do as much homework as possible before investing in an ULIP. This way you will know what you are getting into and won't be faced with unpleasant surprises at a later stage.
Our experience suggests that many a time people do not realise what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options available and understand their working.
Read the literature available on ULIPs on the Web sites and brochures circulated by insurance companies.
2. Focus on your requirement and risk profile
Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should play an important role in the plan you choose.
So if you have a high-risk appetite, go in for a more aggressive investment option and vice-a-versa. Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently).
3. Compare ULIPs of different insurance companies
Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies.
Check the fund's performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor.
Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy.
The companies give you the option to increase the premium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal.
Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another.
Some insurance companies offer you free switches for a 2-year period while others do so only for 1 year.
4. Go for an experienced insurance advisor
Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you.
When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered.
Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan.
His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who will offer you value-added products.
5. Does your ULIP offer a minimum guarantee?
In market linked product if your investment's downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice.
