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Finance

Know 3 Overlooked Factors While Comparing ULIPs

Unit-Linked Insurance Plan (ULIP) is a profitable investment option currently available in India. The ULIP meaning is an insurance policy that combines life cover with wealth creation. Insurance companies invest a portion of your premium in equity, debt, or hybrid fund for a long period to help the money grow. Currently, many insurers offer this life insurance policy, and finding a suitable one can be a little tricky.

While many people use an online ULIP calculator to compare different aspects of this policy, investors tend to overlook many factors due to a lack of knowledge. Here are three aspects that you must consider before investing in a ULIP:

1. Internal Rate of Return (IRR)

When you are evaluating a ULIP, it is of utmost importance to compare the IRR. It is one of the key factors that help you determine the profitability of a particular ULIP. The IRR is a specific rate of the ULIP on which the current worth of all the future monetary inflows from your policy equals the present value of all the future financial outflows linked with your plan. 

Simply put, the IRR means the rate of discount at which the ULIP’s net current value of the future monetary outflows and inflows is zero. A promising ULIP plan is the one that has an IRR value surpassing your anticipated return from the investment. While you comparing different ULIPs, make sure to find their IRR. This will help you understand which policy can offer you the best value for money and help you create a sizable fortune. 

2. Fund Management Charges (FMC)

Most buyers believe that the premium associated with a ULIP is the most crucial point of comparison when choosing a policy. Due to this, people often ignore the FMC, even though it is one of the parameters, which determine the overall cost of the ULIP.

ULIPs gives you the option to invest in different funds. Experienced managers supervise these funds, and insurers charge a service fee. The insurer charges the FMC as a certain ratio (percent) of the entire fund value. To calculate the Net Asset Value (NAV) of your ULIP fund, the insurer deducts the FMC from the ULIP’s overall asset value regularly. This is how the FMC affects your returns from the ULIP. Depending on your insurer and the number of funds to be managed, the FMC can vary. You may not find the FMC on a ULIP calculator; however, the insurers’ websites mention it clearly.

3. CRISIL ranking

Credit Rating Information Services of India Limited (CRISIL) provides a ranking of the country’s available ULIPs. The ranking is decided according to the performance and costs of ULIP funds. Finding the top ULIP plan is much easier when you compare the available options depending on their CRISIL ranking. However, CRISIL does not consider all insurance companies for its ranking structure. Insurers need to meet certain conditions. To be eligible, they must:

  • Sell active ULIPs
  • Have a  minimum performance history of five years
  • Offer either debt funds (short-term or long-term), equity funds (mid, large, or multi-cap), or both 
  • Provide ULIPs that are available for subscription
  • Sell ULIPs with 10-year to 20-year policy tenure 
  • Offer regular and single-premium ULIPs 
  • Make sure that the ULIP’s policy and premium-payment terms are equal

Comparing the ULIP’s performance and additional features is important to determine which policies are worth your investment. However, you must not ignore the aforementioned criteria, as they provide a clearer picture of the ULIP’s pricing and extra expenses, along with their evaluations. Only when you thoroughly compare

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