When planning for your finances, life insurance forms a critical component. Cherry-picking investments will help you reach your financial goals, but it is also necessary to have a safety net in the event of an untoward incident. Life insurance plans are the perfect shield that creates a financial backup in such unpredictable situations. 

When choosing a life insurance cover, there are several options to choose from. Term plans, endowment plans, and whole life plans are some alternatives. But a Unit Linked Insurance Plan or ULIP plan is also a popular choice of life insurance. It is a financial tool that offers dual benefits of investment and insurance in one instrument. Therefore, you can meet financial goals and protection when you buy ULIP; meaning, you can invest to achieve your future financial goals like buying a home, your child’s education or even planning for your retirement while being protected with a life insurance cover. 

When choosing a ULIP, you need to select one that fits your financial portfolio. Thus, your investing strategy must align with the ULIP you select along with the life insurance plan. However, there can be a few mistakes, if ignored, that might cost you in the long run. 

Here are some of them that you must avoid- 

• Selecting an incorrect policy

The primary mistake one can make is picking a policy that doesn’t fit right. Your policy selection should be based on your desired rate of return and risk appetite. For higher return, you can opt for equity-based funds that come with substantial risk. Otherwise, debt-based funds and balanced funds are lower-risk alternatives to choose from. Selecting an incorrect ULIP will result in a policy whose objectives do not align with your financial goals. Thus, it is essential to avoid the mistake of selecting a plan that does not fit your risk appetite and return expectation. 

• Considering ULIPs to be a five-year investment tool

You might be aware that ULIPs have a five-year lock-in period. However, this does not mean that you consider ULIPs to be a five-year investment tool and exit once the lock-in period ends. ULIPs are no medium-term investments. In fact, the mandatory five-year lock-in is to balance out any fluctuations in your investments, helping you earn stable returns over the tenure. In addition, you can also withdraw a portion once such a lock-in period ends helping you have some liquidity to your investment. 

Letting the ULIP run through its entire tenure will help achieve the desired returns based on your financial goals, and offer protection by way of a life insurance cover. Therefore, when you terminate your policy once the lock-in period ends, you end up upsetting your financial goals with no insurance coverage going forward. 

• Not understanding the ULIP’s mission

Ensure that you clearly establish why you are buying a ULIP, meaning, your objective should be clear from the start. Since this tool provides insurance and investment in one instrument, it must be thoroughly established in your mind as to why you are opting for one. If you want only insurance coverage, you can choose to buy a term policy, whereas investments can be made in alternative financial instruments. The tax benefit a ULIP provides, along with the convenience of combining two separate financial goals — protection and investing — in one, is why a ULIP is preferred. Making sure both objectives are met as per your requirements will help you understand your ULIP’s mission. 

• Missing to account for the costs involved in ULIPs

When choosing a ULIP, another common mistake is considering the various charges that are levied. This is critical since they affect your net return and, in turn,  your repayment duration. If you ignore the time value of money, ULIPs ordinarily take 7 to 8 years to break even in bullish market conditions. Thus, your payback period changes due to the costs involved. Ensuring you read the policy’s fine print will help you make an informed decision as to which plan is right for you. In addition, you can also use a ULIP return calculator, a nifty tool that helps to understand the returns your policy generates. 

• Opting for a single premium policy

ULIPs are available to purchase as a single premium policy or a regular policy with periodic premium payments. Regular premiums by way of an annual premium, half-yearly premium, or quarterly premium, are some ways you can take advantage of the investment that leverages the concept of rupee cost averaging. When you opt for a single premium payment, there is hardly any benefit. Further, periodic payments also allow you to avail benefits in your return of income over a longer duration. A single premium policy must be avoided unless you opt for a pure-debt fund. 

These are some common mistakes that will help you avoid debacles in your dual objectives of protection and investment. To know how much returns your investment generates, you can also use a ULIP return calculator.