Your financial advisor has been asking you to consider a ULIP plan for quite some time, and you also think it is a good idea. You are right! Apart from combining insurance and investment in one go, ULIP has several other benefits. However, you can only make the most of those benefits when you don’t make the following mistakes while buying a ULIP scheme.

Mistake 1: Treating a ULIP plan as the 5-year investment

ULIPs come with a lock-in period of five years. That means, you cannot withdraw your investment within 5 years. There are other medium-term investment options in the market – ULIPs are not one of them. The lock-in period is important because ULIP is a market-linked investment. As such, the funds can be considerably volatile on a short-term basis but show better returns in the long term.

It is even more important to let ULIPs run the full tenure when you lean more towards the equity funds. Keeping in mind that you choose ULIPs to meet your long-term goals, you should not exit them because you will disrupt the compounding effect and leave those plans unfulfilled.

Mistake 2: Buying ULIPs without understanding their purpose

You need to have a clear idea about why you want to buy ULIPs. If all you want is an insurance plan, then you can simply go for a term insurance plan. If you want to invest in the stock market, then go ahead and do that straight away. Investing in equity funds can give you appreciating returns in any case.

To choose ULIPs, you need to be clear in your mind that you want to combine the benefits of insurance and investment. You need to be clear that you want an investment avenue that lets you switch between funds. That’s not all! You need to evaluate whether the convenience is relevant to you and how far the tax exemptions can help you. Do not go for ULIPs simply because your friend did. You have different goals and risk appetite than your friend.

Mistake 3: Choosing the wrong ULIP plan

A Unit Linked Insurance Plan has both insurance and investment components. But that is just the basic tenet of the plan. Only if you play all your cards right, then it can help you earn a sizable return. Playing the cards right starts with choosing the right plan.

You choose plans as per your goals, risk appetite, and return requirement. Since ULIPs have a market-linked component, you get to choose from a wide range of funds that include debt and equity funds. If you are leaning more towards debt funds, then you are taking a safer route, or you can take the risky route with equity funds. Most investors begin with higher equity investments and increase debt investments towards the end of the term.

The idea is to keep an eye on the market situation and understand your risk appetite. For instance, your risk appetite is higher when you’re younger than when you are married and have kids.

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So, if you do not make any of the mistakes mentioned above when buying an ULIP, you can be assured that you have made the right choice. Talk to your bank about it now!

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