Investing in a unit linked insurance plan (ULIP) is a wise step to secure your future financially. It is an insurance product that combines the benefits of both investment and insurance in a single policy.

It helps you to save regularly for your long-term financial goals while also providing life coverage. With ULIPs, you can choose your investment plan as per your financial goals and risk appetite and also monitor the investment performance.

How ULIPs Work

ULIPs work in a unique manner. Of the premium paid by the policyholder, a part is used for insurance coverage, and the remaining amount is invested in various investment instruments like equities, bonds, debts, and other funds.

The policyholder is allowed to choose the proportion of investments in debt and equity options based on their investment goals and risk-bearing capacity. As the investment grows, the policyholder receives units that represent their share in the total investment.

Types of ULIPs

ULIPs usually come in three variants – equity ULIPs, debt ULIPs, and balanced ULIPs. Equity ULIPs are ideal for investors with a high-risk appetite as a large portion of the money is invested in equity.

Debt ULIPs are more suited to conservative investors as a significant part of your investments is made in low-risk securities like government bonds. On the other hand, a balanced ULIP portfolio is a combination of equity-based and debt-based investments that suit moderate investors.

Maximizing Returns with ULIPs

If you want to maximize your returns with ULIPs, you should consider the following:.

1. Choose the right plan

   You should select the ULIP plan best suited to your investment requirements and goals. When choosing your ideal ULIP, keep in mind the tenure, investment objectives, and risk appetite.

   To get maximum returns, choose a plan that suits your investment style and caters to your financial goals.

2. Invest for the long-term

   ULIPs have a lock-in period of five years, and it is advisable to invest in them for at least 10-15 years to derive maximum returns.

   In the long run, fluctuations in the market even out, and the returns received from the investments become substantial due to the power of compounding. This power of compounding makes a significant difference in the returns earned, which increases with time and is more substantial in the longer term.

   Related Article Unit Linked Investment Plans: How Do They Work?

3. Opt for regular investments

   You can receive maximum returns from ULIPs by investing regularly, which is also known as systematic investment. It ensures that you invest in small instalments frequently, which even out the various market fluctuations.

   This ensures that you buy low when the market is down during a bear phase and also benefit from the upward movement of the market during a bull run.

4. Monitor your investments

   Regularly monitor your investments and make necessary adjustments to ensure that your investments are on track to achieve your financial goals.

   Review the performance of your investments regularly to assess if the premium paid is in line with the investment goals and also check the performance of funds chosen.

5. Diversify your portfolio

   ULIPs provide the option of investing in different types of funds, including debt, equity, and balanced funds. Diversifying your portfolio by investing in different types of funds reduces the risk and ensures maximum returns from your investment.

   However, make sure not to over-diversify as it might increase management costs and reduce returns.

6. Make premature withdrawals judiciously

   Although ULIPs have a lock-in period of five years, you can make premature withdrawals in case of an emergency. However, such premature withdrawals might incur exit charges, which can reduce the value of the investment in the long run.

   Therefore, it is advisable to make premature withdrawals judiciously and only in case of an emergency.

Benefits of ULIPs

ULIPs offer several benefits to policyholders:.

• Flexibility: ULIPs offer the flexibility of choosing your investment plan and also allow you to switch between plans as per your changing investment goals.
• Tax benefits: ULIPs provide tax benefits under section 80C of the Income Tax Act, 1961, and any income generated from ULIPs is exempt from tax under section 10(10D) of the Income Tax Act.
• Life coverage: ULIPs provide a life coverage benefit, which means that in case of the policyholder’s death, the nominee receives the sum assured plus the fund value.
• Transparency: ULIPs provide transparency in terms of information about the investment portfolio, its performance, and fund managers.

Conclusion

A unit-linked insurance plan (ULIP) provides the benefit of both investment and insurance and is an excellent investment option for long-term financial goals.

To derive maximum returns from ULIPs, choose the right plan, invest for the long-term, opt for regular investments, monitor your investments, diversify your portfolio, and make premature withdrawals judiciously. With ULIPs, you can secure your future financially while also benefiting from the power of compounding.