Unit Linked Insurance Policies - Advantages and Disadvantages

Posted by ankita on February 7th, 2017

Until recession struck and the stock markets saw a steep fall, these used to be one of the widely sold products by insurance companies in India. However, a crashing stock market shattered the hopes of investors who were pained to see the NAV of their policies plunging down and putting them into losses.

Unit Linked Insurance Policies are termed as ULIPs in short. In this kind of policy, the premium paid is divided into two parts. One part is used for payment of premium for insurance coverage and the other part is allocated to equities. In the initial 3 years, a substantial part of the premium paid is allocated for insurance coverage. Later this proportion decreases and larger part is allocated to equities. 

ULIPs are essentially an insurance product with investment benefits. But it is a long term investment. A horizon of 10 to 15 years must be kept in case of investing in ULIPs. There are several risks associated with ULIPs also. 

ULIPs invest in equities. Equity market is subject to fluctuations and thus the returns on this policy can't be assured. However it can be assumed that if a person stays invested for a long period of time in equity markets, the results will be positive. 

Investment in ULIPs require patience. It is not a short term investment. It is also not meant for people with a short term goal. ULIPs are ideal for young people who can keep their money locked in for a longer period of time. It is an ideal product for babies who may need a substantial amount of money for their education in the later part of their life. 

 As an ULIP policy is bought, the owner is given units. The Ulip Nav of the units fluctuate or vary as per market conditions. ULIPs can give high returns if one stays invested in ULIPs for a long period of time. Equity markets do give positive results if an investment is made into it for a long period of time. 

Thus ULIP is insurance cum investment product. If invested in a proper manner, it can meet one's long term financial goals apart from giving an insurance cover.

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