Why insurance as a mode of investment?
There are many modes of investment which include the equity markets, commodities, debt funds, mutual funds, ULIP,etc. An investor can also invest in Insurance or ULIP. Insurance is the mode of investment which is claimed to be the best and safe option. This form of investment will be stable and profitable as long as the premiums related to it are paid regularly.
When life insurance is considered for investment, it is claimed that it is the best choice for most individuals as it is the least expensive sort of insurance and leaves extra money for other investments. While in the permanent life insurance, the policyholders get to accumulate the cash value but it requires costly management fees and in addition to that, agent commissions related to the policy. There are advantages of investing in insurance and ULIP like tax exemptions, covering up of anticipated risk and loss, disciplined savings, etc.
What is ULIP?
When these advantages of insurance and investment are combined, it becomes ULIP. ULIP is the abbreviation of Unit Linked Insurance Plans. Similar to the payment of premiums in any insurance plans, the policyholder can pay premiums monthly or annually in ULIP. This premium is then divided into two parts. From this, a small amount is allocated to secure life insurance and the rest of the amount is invested just like the mutual fund does.
When a policyholder invests for the term of 5/10/15 years, he also goes on accumulating the units. The policyholder gets the option of investing in equity and debt. For a long term ULIP, going for an equity oriented fund would be profitable as it is a growth option. If the policyholder wants to play safe, he can invest in debt oriented fund.
The benefits and risks related to ULIP
ULIP carries its own set of advantages too. These advantages are:
- Market-linked returns: all the returns are linked to the market while these returns are a part of the premiums and they are invested back again in the market-linked funds which include different market instruments.
- Life protection and savings: there are twin benefits for ULIPs of life insurance and savings at market-linked returns. Thus, the investor gets the opportunity to invest his money and earn higher returns even while taking care of his protection needs. The investor tends to take up savings regularly, which can prove as beneficial to create wealth.
- Flexible options: there are various wide ranges of flexible options available to the policy holder like switching between investment funds, partially withdrawing from the fund and option of investing an additional sum of money as and when desired.
Every mode of investment carries a certain risk. This risk then defines how the investor will behave with the scheme. The risks involved are:
- Market risk: every mode of investment has its own set of market risk associated with it. While ULIPs are the most affected by any fluctuations in the market. Because of varied options within the plan, the scheme gets afflicted from all fronts.
- No guaranteed returns: ULIP scheme doesn’t have guaranteed returns and the investment risk involved in the scheme is borne by the investor himself. The expertise of the fund manager and the performance of the stocks determine the gains and losses an investor would incur.
- Liquidity risk: due to the lock-in period of 3 to 4 years, the investor may lack liquidity if he desires to redeem his investment.
- Past performance indicator: the past performance of a fund is never a highlight of its future performance as the market can become volatile anytime and it is impossible to determine the market behaviour.
- High cost: fees undertaken for ULIP are very high. These high fees can affect the returns negatively if there is a slowdown in the market.
ULIP as an investment
With evolving times, ULIPs have also changed according to the market behaviour. ULIP has transformed into a low-cost option from a cost-bundled product. These low-cost products are suitable for the investors who wanted to combine insurance with the investments. It won’t be comfortable for many investors to shed their inhabitations and experience with this mode of investment. Many of the investors have lost a lot but the mortality charges are higher when it comes to these kinds of investments.