In recent years, a must-have financial instrument is the Unit Linked Insurance Plan (ULIP). It is because of its unique structure that its popularity is on the rise over the last few years. Even though they have been around for a decade now, their awareness has been spreading amongst investors in recent years. If you are contemplating what is ULIP and how would you invest your money in it, this article will clear your doubts. Read further to get a better understanding of ULIP and how to go about investing in them.
What is ULIP?
The meaning of ULIP is simple. It is a product that offers life insurance and investment in a single plan. The life insurance aspect ensures that in your absence, your loved ones have a financial backup to rely on, while the investment aspect allows you to grow your money by providing returns over the years. This allows you to hit your two financial goals with one plan. When you buy a ULIP, you are creating a financial backup for your family while also generating wealth to achieve your long-term goals.
Similar to any other life insurance, with a ULIP, you are required to pay premiums. However, here, your insurance company allocates the premiums differently than traditional life insurance. They allocate a part of the premium towards providing you with a life cover. While they invest the remaining half in funds of your choice. Use a ULIP calculator to get an estimate of your ULIP premium based on your goals and the life cover you require. Insurers allocate the investment that you choose to you as units. The Net Asset Value (NAV) of these units is calculated regularly. Since ULIPs are directly subjected to market fluctuations, depending upon the markets, these units rise or fall. Once you understand how a ULIP works, it is important to know how to invest in it.
How to invest in a ULIP?
ULIP is a two-in-one product that offers the dual benefits of life insurance and investment. Before investing your money in a ULIP, it is essential to understand your risk appetite. Once you know the risk that you will take with your investment, you can go ahead with your fund allocation. There are several funds that a ULIP plan offers. Here are the common categories of funds you can choose to invest in:
Individuals who have a high-risk appetite can invest in equity-based funds. In these funds, your money is directly invested in the equity market, and depending on how they are performing, your returns vary. While the risk of such investments is high, so is the reward. You can access the equity fund that you wanted to invest in by seeing their portfolio and checking the returns of the past years.
Debt and income funds
Fixed-come assets, government securities, and corporate bonds are the usual assets that are a part of the debt and income funds. These have low-to-medium risk towards them and the reward is also on those lines. For individuals who have a medium-risk appetite, these funds would be the perfect addition to your ULIP plan. Since there are a variety of options available in this category, it is essential that you do your research before narrowing down your investment.
Cash funds, also known as money market or liquid funds, are low-risk, low-reward funds from which you can benefit. In such funds, your money is at a low risk since it is invested in highly liquid instruments like cash deposits, treasury notes, call money, certificates of deposit (CDs), and other similar market funds. The low risk comes with the consequence of low returns. Investors who do not want to track the market usually prefer such investments.
When you want to invest in equity but are wary of the risk involved, you can simply invest in a balanced fund. When you buy a balanced fund, your money is invested in both debt and equity. It ensures that, with moderate risks, you earn moderate returns. You can use a ULIP calculator to get further clarity on your returns from these balanced funds.