A Unit Linked Insurance Plan (ULIP) is an ideal financial product for individuals who want to have life insurance coverage while making investments at the same time. With a ULIP, policyholders can invest in various market-linked investments such as equity and debt while having insurance benefits. It ultimately allows them to achieve their long term financial goals, such as wealth accumulation, retirement planning or their child’s education. However, before investing in ULIPs, individuals must understand the impact of various ULIPs. Therefore, this article covers the different types of ULIP plans and how they will affect an individual’s financial goals.
Equity Oriented ULIP
Once you pay the premium amount, a significant portion will be invested in the equity markets. This makes an equity-oriented ULIP suitable for individuals whose investment horizon is long and who have high risk appetite. In this type of ULIP, even though it includes the risk of market volatility, it has the potential for high returns. These ULIPs can help generate significant amounts of wealth over a long span of time, making them perfect for long term goals such as retirement planning or purchasing a property.
The impact of equity oriented ULIP would be as follows:
- Over the long term, the equity markets have historically provided higher returns than other asset classes. Thus it is ideal for wealth accumulation.
- Short-term market fluctuations can be minimised by having a long term perspective on your financial goals. This increases the potential of acquiring steady returns.
Debt Oriented ULIP
In debt-oriented ULIP, a portion of your premium is allocated to debt instruments such as corporate bonds, government securities, and other fixed-income securities. This type of ULIP works for investors who have a low risk appetite (conservative investors) and prioritise financial security over high returns. This is because debt oriented ULIPs offer stable and predictable returns.
The impact of debt oriented ULIP on long term financial goals would be as follows:
- Individuals would get consistent returns while preserving their capital.
- It might not be suitable for individuals aiming to achieve high capital appreciation since the returns of debt oriented ULIPs are lower than equity oriented ULIPs.
Balanced ULIP
Individuals who want to invest in equity and debt instruments can choose to pay premiums of a balanced ULIP, which is also known as a hybrid ULIP. With these plans, individuals can diversify their investment portfolio to balance the risk-to-return ratio. This makes it suitable for investors who have a moderate risk appetite but want to steadily grow the value of their capital.
The impact of balanced ULIP would be:
- Reduces risk associated with equity instruments by diversifying along various asset classes while having better returns than debt instruments.
- Allows moderate growth of capital and therefore is suitable for medium to long term financial goals.
Liquid/Cash ULIP
If an individual’s investment horizon is short and wants to maintain liquidity, opting for liquid/cash ULIP would help him achieve his goals. This is because liquid ULIPs invest in short term debt instruments and money market securities. While they offer lower returns than other types, they are the only ULIPs that provide quick access to funds.
Their impact on an investor’s financial goals would be:
- They are suitable to meet an individual’s short term financial needs and are not ideal for long term as the returns provided are lower than other types of ULIPs.
- Cash ULIPs focus on the preservation of capital while minimising the risk associated with investments plan.
Child ULIP
If an investor wants to secure their child’s financial future, they could choose to invest in a child ULIP. This plan is designed to provide cover for the parent while ensuring that the child’s financial needs are met in the absence of the parent. Additionally, the child component of the ULIP can be invested in any asset class such as equity, debt or a balanced portfolio.
Its impact would be:
- It allows policyholders to opt for an investment strategy that would meet their child’s educational and other needs.
- It is ideal for meeting long term goals related to the child’s future.
Retirement ULIP
Post-retirement, if an investor wants to have a steady income, they can go with retirement ULIP. This plan provides a financial cushion during retirement by focusing on long term growth and capital preservation. Additionally, the investors can customise the investment component of the premium and allot it to equity, debt or a balanced portfolio.
The impact of retirement ULIP on your long term financial goals would be:
- It helps individuals remain financially independent post-retirement.
- Individuals can build a corpus that provides a regular income stream via the systematic withdrawal plan during retirement.
Conclusion
To align their investments with their long term financial goals, investors must choose the right ULIP plan. ULIPs offered by various insurance providers such as Tata AIA provide unique advantages and are suitable for individuals with different risk appetites and financial objectives. By understanding the focus of equity oriented, debt oriented, balanced, cash, and retirement ULIP, investors can make educated decisions that would help them achieve their financial aspirations. However, individuals must assess their risk tolerance, horizon of investment, and goals to protect and grow their capital.
Disclaimer
The information provided in the above article is for informational purposes only. It is not a professional or legal advice. The Insurance Regulatory and Development Authority of India (IRDAI) is not responsible for decisions made based on the information available in this article.
