Unit-linked Insurance Plans, or ULIPs, are one of the few life insurance plans available today, that offer the benefits of investment alongside a life cover. Not only do these plans tend to be a long-term commitment, but it is also said that they work best in the longer run.
Since ULIPs come with a wealth creation aspect, most people who opt for these plans are focused on increasing their wealth via them. The goal with ULIPs is often two-sided – to secure one’s future as well as to secure the future of one’s family.
But how do you use these plans to build your long-term wealth? If you are new to ULIPs, you may find that these plans may not show rapid growth. It is easy to get discouraged if you look at only the initial growth of Unit-linked Insurance Plans.
However, if you know how to maintain these plans for the long term, you may end up reaping some wealth creation benefits.
To better understand how to build long-term wealth with ULIPs, let’s first take a look at what is a ULIP.
Unit-Linked Insurance Plans
ULIPs, also known as Unit-linked Insurance Plans, are life insurance plans with a wealth creation side to them. The premium you pay for these plans is usually divided into two parts. The first one is directed towards your sum assured that offers you the life cover. The second part is invested in funds to enable wealth creation for you.
You can use a ULIP premium calculator to get estimates of how much sum assured can you expect for the premiums you wish to pay, as well as the returns on investments you make through the plan.
These plans are ideal for a range of people, but mainly for someone who seeks a life cover and also wants to dabble in investments alongside, without having to buy a second plan for the same.
Wealth Building With ULIPs
Now that you know what a ULIP is, let’s dive into how you can create long-term financial growth with ULIPs.
- Long-term plans
The first step to creating wealth with ULIPs is to know that these plans work best in the long term. Most ULIPs come with a lock-in period of five years. You are not able to surrender your policy within the lock-in period.
Also, when the plan is within the lock-in period, there are a number of fees and charges associated with it. Hence, a substantial amount of your premium is spent on these fees. Consequentially, you may see slower growth in the first five years.
Following this, many policyholders may be disappointed with the growth of their ULIPs. However, there is little reason to feel this way if you understand how these plans work. Once the plan is out of the lock-in period, some of the charges are either reduced or removed. This allows your policy to grow better in the later phases.
- Choice of Funds
Another aspect to consider when trying to create long-term wealth with your Unit-linked Insurance Plan is the type of funds you invest in.
In the case of ULIPs, there are three major fund choices available. The first type is equity funds. These are the type of funds where the yield is expected to be high, but so are the risk levels.
The second type of funds is debt funds. In this case, the funds tend to have lower volatility, but the returns earned are also slower, especially when compared to equity funds.
The third type is hybrid funds. These funds are a mix of equity and funds. They are known to offer a balance of risks.
While you are looking to grow your wealth with ULIPs, you should also be aware of your risk appetite. Usually, the policyholder’s risk appetite tends to be higher in the initial years of the policy, as it may be more possible for them to recover any losses in the later years.
In the later years, it is much preferable for policyholders to switch to either debt or hybrid funds as it is advisable to ensure steady, albeit slower growth.
- Life Insurance
Apart from this, remember that ULIPs are also life insurance plans. Throughout the duration of the policy, you are afforded a life cover. This means that the plans also help you create long-term wealth in the form of future security for your loved ones.
Creating future security with ULIPs is easier than you may believe, especially since these plans are managed for you by fund managers. ULIP calculators should help you better understand what to expect from these plans in the long term, i.e., the duration of the plan. Remember, since ULIPs tend to work better in the longer duration, aligning them with your long-term financial goals may prove to be more advantageous.
