It is human to consider all risks to be physical in nature – whether it is the risk to life, fear of disability or any critical illness. However, in today’s highly unstable times, financial risks must be dealt with on war footing too! This includes not just mitigation against volatile markets, but even simple inept and undisciplined financial planning.
Unit Linked Insurance Plans (ULIPs) are recognized as being among the safest investment options that provide investors with excellent avenues to grow their wealth, while also giving protection for their future.
How do ULIPs stand out?
The best ULIP plans in India help you make informed financial choices while also giving you the peace of mind associated with a life insurance cover.
- Financial discipline through lock-in: Ensures that your money is safely put away for at least 5 years thus discouraging impulse spends without first creating a safety net for the future.
- Policy cover for eventualities: Newer regulations have mandated a policy cover that is at least 10 times the annual premium, thus providing your family with immediate succour to handle sudden setbacks.
- Flexibility to maximize returns: Investors can choose to invest in debt or equity or a combination of the two (balanced funds) based on their risk appetite and other factors like age and responsibilities on the horizon. They allow switches between underlying funds based on fund performance, thus giving you greater control over your money.
- Tax benefits: Your gains from ULIPs are tax-free since they come under the umbrella of insurance products. This gives them a great advantage of mutual funds where your short-term and long-term gains are eligible to be taxed.
Experts suggest studying ULIP returns in 10 years to better understand how they can serve your financial needs and helps you achieve your Life Goals. Let us look at some data that will make your decision easier.
Returns classified by type of fund
Debt and equity funds carry a varied risk burden, and hence it’s a given that ULIP performance will also depend on the underlying funds in your plan. We are going to focus primarily on ‘balanced funds’, since this high-value category is what a majority of investors are interested in.
- Balanced Funds (High Equity) – These are higher risk investments for those having a long-term investment horizon. The best ULIP plans in India offer an annual return of over 25%, averaging over 12-13% over a 5-year period.
- Balanced Funds (Moderate Equity) – This category looks to provide investors with some stability with debt funds balanced against high-value equity funds. Here, the best plans offer annual returns averaging over 15%, with a 5-year average of about 11-12%.
- Balanced Funds (High debt) – These relatively safer investments obviously offer conservative returns that are more suitable for those with short investment horizons. The five year return average rests at around 8%.
What are some dos and don’ts one should be aware of?
Let us wrap up with some crucial factors you should consider to invest in the plans that offer the best ULIP returns in 10 years.
- Give preference to ULIP plans that companies are offering online. You will get the best tools to compare a variety of plans and rate the performance of their underlying funds before making a choice.
- Choose ULIP’s that offer a larger flexibility to switch between funds and also have many classes of funds on offer. The better the mix between high performing equity and debt funds, the easier it will be to maximize your returns while also keeping your financial liabilities on the radar.
- ULIP charges are now heavily regulated. Make sure you understand the charges and penalties on your plan and choose ones with the least impact on your returns.
- ULIPs that provide you flexible premium payment options should be given preference. Look for ULIPs that have a wide term flexibility (spread out over 15 years or more).
Remember, ULIP performance will be at its best only over the long term. In the interim, you will have your premiums to be paid at the frequency decided with your fund manager.
Hence, you must ensure that you have income assurance over a 5-7-year period. Similar to a term life cover, missing premium payments will cause your policy to lapse. You must also be assured that you will not need that money for the tenure of the plan. Interim withdrawals will be heavily penalized (through discontinuance charges) causing you loss over the long term.