A ULIP plan is helpful in various ways. It not only provides financial stability to your loved ones in the unfortunate event of an eventuality but also offers high market returns. Therefore, you can't go wrong when buying the plan. Here are some common mistakes to avoid when you buy a ULIP policy.
Picking the Wrong Plan
Ensure to choose a ULIP plan based on your risk appetite and return requirement. If you can take a higher risk and want a higher yield, you can go for an equity-focused plan. You can otherwise look at predominantly debt plans or pure debt plans. If you are not sure about which is the best savings plan for you, talk to an expert who works under the insurer.
Choosing a Single Premium Option
A ULIP plan often comes with the options of one-time and regular premium payments. The regular investment can be monthly, quarterly, half-yearly or annual. Depending on how frequently you want your cash flow, you can pick a suitable timing.
With a single premium option, you can't get the advantage of the rupee cost averaging. But this benefit comes with a regular premium payment plan. It also helps in spreading your tax savings across more years. Unless you want to invest in a pure debt plan, consider avoiding a single premium policy.
Not Understanding the Switch Feature in ULIPs
Say, you have chosen a debt plan. That doesn't mean you can't change your mind. A ULIP allows you to switch between plans with no tax implications involved. However, you should try not to be fickle with your choice. If you have picked a specific plan and see that it doesn't suit your risk profile, you can switch to another plan. Thus, you can always go for the best savings plan.
Regarding ULIP as a 5-Year Investment
The lock-in period of ULIPs, as you know, is of 5 years. But that doesn't mean you should exit the plan right after 5 years of investment. This kind of plan is not meant for medium-term investment. The lock-in period is meant to ensure liquidity lest any emergency should arise.
If you are invested mainly in equities, it's recommended to allow the plan to run its whole tenure. Since a ULIP plan is a long-term investment, redeeming it in 5 years reduces its potential to give high returns.
Not Considering the Costs Entailed
Costs make a prominent difference to not only your overall returns but also your payback duration. Under bullish market conditions, a ULIP needs almost 7-8 years to break even. It is supposed to be your payback period without taking into account the time value of money. There are invisible and visible loads on your plan and so, you must read the fine print to know about all the loads. You can also speak to the provider's staff about the costs you are expected to incur.
Another mistake to avoid is that ULIP provides guaranteed returns. If you invest in the best savings plan from a reputed insurer for a long period, you can increase your chances of gaining good returns.
