Today, there is a wide range of investment options. They are as unique as people’s needs and requirements.
If you are someone with particular financial goals and expectations, then there will be a well-suited plan available for you. For instance, if you want to financially secure your loved ones’ future in uncertain times, then you can buy a term insurance plan. If you want to invest money towards your future goals, then you can invest in long-term mutual funds. However, people who want to do both – need to secure life and want returns on investments, can go ahead with a ULIP investment.
Unit-linked insurance plans (ULIPs) are a combination of insurance and investment. In this type of insurance plan, a part of the premium goes towards investments, and another part of it goes towards providing you with a life cover. Although ULIPs have more to do with life insurance purposes, there are a lot of people who consider them for investment purposes.
Previously, unit-linked insurance plans came with an investment tenure of three years. Later on, in 2010, the Insurance Regulatory and Development Authority of India (IRDAI) raised the lock-in period to five years. You are prohibited from withdrawing your ULIP fund before five years. There’s no liquidity in those five years. Even though you are allowed to exit ULIP after five years, should you do it?
Withdrawing your funds as soon as the lock-in period of the ULIP finishes can hamper your returns and the overall financial goals that you had previously set.
1. No Compounding Benefits
If you treat ULIPs as an investment product, then know that they are going to give you considerable returns, specifically in the long run. Whether you choose to invest in equity or debt funds, you will enjoy very little to no beneficial returns in less amount of time. The longer you keep your money invested, the more compounding interest they will gain and the more profitable it will be for you. Stay invested for the long term for enjoying all the perks of compounding.
2. Influence Of Market Cycles
You can invest in various equity and debt funds in unit-linked insurance plans. Everyone is aware that equity markets are highly volatile. Therefore, when you stay invested for a long time, then the market cycles get balanced. If you cash out the money as soon as you hit the lock-in period, then the market may be on a downcycle. With this, you will lose out on a lot of potential profits. Hence, you must consider staying in the markets for a long time.
3. Front-loading Of Charges
The ULIPs usually apply almost all the charges in the initial 4-5 years. These charges include premium allocation charges, management of funds fee, allocation charges for the funds you opt for, administration fees of the policy, etc. Hence, it becomes a significant reason to not terminate the policy as soon as the lock-in period is over. Also, charges for the above-mentioned things are deducted from the NAV of the funds.
The charges are high in the first year and are reduced over the years. Hence, the real growth of your invested funds happens after the lock-in period. Thus, it is advised to stay invested for the long term and not exit your ULIP policy after five years.