Over the past few years, Unit-Linked Insurance Plans (ULIPs) have gained popularity as it provides dual benefits of insurance as well as investments. People opt to invest in ULIP plans as it provides a better opportunity to make affordable investments and get tax benefits. Until 2010, ULIP was not a favourable investment option as it came with charges soaring up to 7-8%. It suffered a loss due to the front load cost.
The regulators realised that the product was being mis-sold and made necessary changes in the year 2010. These changes included the lock-in period being increased to five years and limits on charges. The policies with less than 10 years cannot have charges of more than 3%. Owning to the life insurance factor in the ULIP plan, there are mortality charges, whereas the mutual fund handles the returns on investment. On taking out the various charges, ULIP starts operating like any other mutual fund plan. These charges include allocation charges, mortality charges, administration charges and fund management charges.
It is simple, the Net Asset Value (NAV) of the funds are declared every day. The returns you receive are the difference between the NAV of the present date and NAV at your entry point. Mainly there are three types of options offered in funds for ULIP investors: debt fund, equity fund and balanced funds. The returns you receive depend on the choice of plan you make amongst these.
You can choose a large-cap, a mid-cap or a small-cap fund depending on your risk appetite. As per a report in 2019, equity ULIP plans have given returns of 4.1%, whereas large-cap funds have given 9.85% and multi-cap funds have given 7.05% over the period of 5 years. In case you aren’t satisfied by the returns you are receiving on the funds you chose you can opt to switch funds. However, this facility comes with specific charges.
It is better to observe returns on ULIP for a period of 5 years or more as it comes with a lock-in period of 5 years. Also, the results can be good if the investment is of a longer tenure. Under the directives of the market’s regulators, mutual funds underwent some categorization changes. Although this merely affected ULIPs as it is an IRDAI governed product. The return or comparisons don’t get affected no matter how much amount you invest in ULIP as the insurance regulator already caps the charges and net reduction in yield of the investor.
If you are planning to buy ULIP plan, you must look beyond the returns and assess your financial goal and health prior investing. ULIPs includes a few charges for the mortality, fund management and other facilities. Moreover, it comes with a lock-in period of 5 years. Withdrawing money before maturity date can lead you to pay extra charges. All these in total can affect your financial conditions, which is why you must consider them and look at the bigger picture before investing.