Sometimes, it can be challenging to maintain too many investments and insurance policies. This is one reason why Unit-Linked Insurance Plans (ULIPs) are gaining popularity. A ULIP combines life insurance cover with investment options, ensuring that you can benefit from both features under one policy. Read on to know more.
How ULIPs work
As already mentioned, ULIPs have two features, life insurance and investment in different funds. When you pay the premium for ULIP, the insurance company uses a portion of to invest in equity, debt, or a combination of funds after deducting applicable charges. You can choose where to put the ULIP investment as per your financial expectations and risk tenacity.
ULIPs have many features, such as fund switching and tax-exemption help maximize your returns. There are many other strategies you can adapt under ULIPs to get the best out of your investments. These include:
1. Automatic transfer
The Automatic Transfer Strategy (ATS) is a feature that allows wealth creation without taking much risk. It is a systematic investment option in ULIP funds, where you can first allocate your capital completely in comparatively safer debt funds.
If you activate the ATS, the insurance provider will automatically transfer a fixed amount to an equity fund of your choice every month. With this strategy, you can enjoy higher returns from equity-based investments without having to expose your entire capital to high risks.
Before purchasing a ULIP, ensure to ask your insurance provider if they offer the ATS facility. You can activate it while buying the policy or later. Some insurers even let you opt for ATS from their website, eliminating the need to visit a branch office.
2. Portfolio based on life cycle
The ULIP performance depends primarily on two things, the financial market’s condition and whether you invested in equity or debt funds. The best way to diversify your investment using ULIPs is to divide the capital in both debt and equity funds, creating a balance between risk and return.
However, most investors do not want to take a high risk when they are older because they need more financial security for their family. If you are an inexperienced investor, it can be challenging to create a balanced investment portfolio on your own.
If you select the portfolio based on the life cycle feature, the insurance company helps you in strategizing the investment. The insurer will invest a lesser portion of your premium in volatile equity-based funds and a higher percentage in debt funds. They automatically increase the debt fund investment with time, further securing your savings.
3. Trigger portfolio
If you want the insurance provider to automatically take advantage of the financial market swings for higher profits, this strategy can help. For this technique to work, you have to decide on a trigger that will initiate a reallocation of funds. For instance, if you ask the insurer to re-balance the funds when the equity fund’s Net Asset Value (NAV) decreases or increases by 15%, they will do so to get the best result out of your ULIP investment when the trigger occurs.
As only experienced professionals manage these funds, it improves the possibility of a higher return.
4. Target asset allocation
Asset allocation is the key to how much return you can expect from your ULIP investment. Depending on your risk-taking ability and life goals, you have to decide how to distribute your premium among equity and debt funds.
The target asset allocation strategy lets you select a fixed proportion that the insurer maintains while distributing your investment among different funds. The insurance provider allows you to re-balance the capital quarterly, as per your changing needs.
With these techniques, you can control the ULIP performance to some extent. While the returns depend on the market situation, these tactics make ULIPs reasonably safer and profitable investment instruments.
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