A unit Linked Insurance Plan (ULIP) is nothing but an investment product that offers you the benefit of investment in the capital markets along with insurance.
Take a look at some of the advantages and disadvantages of an ULIP
Advantages of an ULIP
One of the advantages of the ULIP is that it can offer you superior returns depending on the fund that you invest in. For example, if the fund you have chosen has heavily invested in the capital markets, chances are that if the stock markets do well, your fund may also do well.
The other advantage of an ULIP is that it provides insurance cover as well. The insurance cover may not be as great as a term plan, but, it should be good enough. The above are the two major advantages of an ULIP.
Disadvantages of an ULIP
One of the biggest disadvantages of an ULIP is that the returns cannot be guaranteed. For example, if you have chosen an ULIP that invests bulk of the money in equities and the shares are not doing well, chances of losing money cannot be ruled out. This is one of the biggest risk and perhaps the only disadvantage that one can see from an ULIP.
One of the other disadvantages of the ULIP is that returns are very poor. This is because there are a host of charges that are associated with the sceheme, including administrative charges, mortality charges etc. This brings down your returns substantially. In the first year, almost 5 per cent of your money is lost paying these charges.
Other features of an ULIP
In an ULIP one can make partial withdrawals. This means if you have invested a sum of Rs 10,000, it is possible to withdraw Rs 5000 from the same. Also, in case you are not satisfied with the policy you can ask for a withdrawal within 15 days from receipt of the policy. Another feature of the ULIP is that you can switch from one fund to another. However, the feature should be available for a successful switchover.
Should you invest in a ULIP?
ULIPs offer you a combination of insurance and returns. If you have invested in an ULIP that parks a substantial money in equities, there is an element of risk in the product. Of course, if capital markets do well your fund could generate a superior return as well.
Having said that we believe that there are way to many charges on the ULIPs which make them an unattractive proposition.
So, if you want to really move away from the disadvantages of the ULIP, we suggest that you go in for a term insurance and a large cap equity mutual fund scheme.
So, it will offer you the same benefits of an ULIP, that is exposure to equities as well as insurance coverage. In fact, the term insurance coverage could be higher depending on your age. We suggest that you in for a term policy of at least Rs 1 crores.