Invest in ULIP, the double edged sword

In the investment world the instrument ULIP generally known with a pet name, Double Edged sword. Why? This is the instrument providing disciplined investment opportunity as well as Insurance to the policy holder.There are certain things to be considered while selecting a ULIP as an investment instrument for an investor. These things are most important about ULIP before starting the policy. Before investing in ULIP keep the following points in mind:

# ULIP is an instrument which is not for short term investor.
# ULIP investments are for those who have a long term focus of more than 10 years.

Why this is not an instrument for short term investors? Of course, its high cost compare with a mutual fund or an ordinary insurance like endowment or money back policy. A ULIP is a better instrument for those who have future plans like higher education of kids, retirement plan etc.. Taking ULIPs with a short term focus not only give you the required result but also you will lose your money.What are the things you generally required to know before taking a ULIP policy?#ULIP is best for a disciplined investor by considering its costs#ULIPs are directly linked to equity, debt or money markets and depends the nature, the risk is high or low.# Do not follow what the agent is telling. There are competitions in the market and you can receive promises and guarantees on their product at any time. Keep in mind that ULIP is a long term investment who focusing more than 10 years and the promises and guarantees providing by the companies cannot save your money because the product is linked to stock or debt markets directly.# Unlike mutual funds, ULIPs cost structures are not centrally fixed. Costs for the product is entirely depends on the company and the reality is, when the agent approaching you will first introduce the policy which have more costs. They are focusing to the commission and you should be well aware about the cost structures before taking the policy. PAC, the Premium Allocation Charge, is vary upon companies and it is charging from our premium year to year. This will reduce the actual investment amount and an investor should be aware about the PAC structure and should compare this with charges of peers to identify the cost and select the best policy. Most time PAC can be 25% or more in the first year and can be reduced following year. Remember, this amount is deducting from our premium.Some insurers keep this as Zero and some will calculate the PAC as a percentage of your life cover or the premium paid and will deduct from your fund value.# Consider the exit load or surrender charge of the policy. If this is high, then you are losing your money. This is too vary product to product and company to company.To work around the cost related issue, find and read the illustration of benefits providing by insurers. This will give you and exact idea about the costs of the product, growth rate and the “net yield”, which is calculated at post-cost returns of 6 per cent and 10 per cent as prescribed by the insurance regulatory or council. Using the net yield you can compare the scheme with its peers. It make sense to go for the one which has highest net yield.# Identify and compare the mortality charge for insurance cover, Fund Management Charges additionally charging for a ULIP by insurance company.# Identify the life cover you will get with the policy. This range possibly decide by the multiple of premium, set by the insurer. As a thumb rule, you required a life cover of five to seven times of your annual gross salary and that will do better for you.# One of the most important factor on ULIP to identify is its type. There are Type1 and Type 2 ULIPs available in the market. A Type1 policy pays the higher of sum assured or fund value as death benefit. Where, Type2 pays the sum insured as well as the fund value. Here, the premium amount paying for the ULIPs whether is it Type 1 or 2 are same and you decide which one you required.# Fund options are the next considerable part in the ULIP while selecting. Most products generally has multiple fund options for conservative to aggressive. Selecting a fund from this category is depends on you as per your risk appetite and nature. Conservative fund generally investing with secure products like government securities money markets and which can provide you safety on your amount invested. An aggressive focused on equity markets in a percentage of 80 to 100 of your premium amount. This is risky because it is entirely depends on the stock market. But compare with conservative fund, an aggressive fund can provide you far better returns.# Expected returns are another considerable factor. You will get an exact idea on the returns what you are going to receive, once if you are well studied and aware about the above points. Performance of the fund should be a considerable factor. You should ask and have good awareness about the fund performance compared with its benchmark. Whether it is out performing or under performing the benchmark for the last couple of years and what is the status of this fund comparing with other funds from its peers, all should be well clear and understandable.# Find out the switching options with the policy. How many free switching options providing by company and if you want more, what is the cost per switch are to be considered.# Finally ensure your documents, nominations are clear and well arranged. Identify the procudures to surrender, withdraw the policy as well.

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