5 things to check before buying a Ulip

Procrastination. It's a term that goes hand in hand with tax planning. Collectively, we seem to push the onerous task to the fag end of the year. Then, as the shadow of the taxman looms large, we scramble for the fastest and simplest ways to save tax, which typically means an insurance policy. This explains why the latter's sales peak from January to March.

In recent years, Unit-linked insurance plans (Ulips) have become popular. Yes, it provides a good opportunity to make a reasoned investment along with the benefit of tax exemptions. However, it is necessary to check out a few issues to avoid dissatisfaction later.

1.Don't let tax planning be the sole motivator
While tax planning is clearly on the agenda, you should also assess the objective for which you want to purchase an insurance policy. Is the policy being bought for longterm wealth creation, retirement planning or building a corpus for your child's future? A decision that is prompted solely by the need to save taxes often results in the purchase of a wrong or an unsuitable product.

2.Check the charges. These can derail your planning
All Ulips come with a set of charges, such as the premium allocation charge, mortality charge, policy administration charge and fund management charge. It is critical to understand the quantum of each of these charges as they can substantially reduce the amount available for investment. For instance, the premium allocation charge is normally front-ended or higher in the first few years of the policy tenure.

3.Go in for a long-term investment horizon
'Pay premium for just three years.' How often have you seen this phrase in Ulip advertisements? It's a tempting carrot, but you must read between the lines. Once you stop paying the premium, the life cover lapses. So if anything untoward happens to you, only the residual fund value will be paid to your nominee, not the sum assured. Moreover, various charges continue to be deducted from the residual fund value until it ends and the policy expires. This 'advice' stems from the fact that sales commissions are higher in the first three years.

4.Always opt for the maximum sum assured
Most agents will tell you to go for the minimum sum assured, ostensibly to push up the amount that is invested and, hence, earn better returns. Instead, opt for the highest amount possible as the mortality charges are normally low and, in the long term, this move will not affect your corpus adversely. Ask the salesperson for an illustration of both options for a clearer picture. Remember that the policy should be able to support your family after your demise.

5.Choose investment options based on your risk appetite
Most people pick the equity option indiscriminately without understanding the risks involved. Remember, a Ulip is a marketlinked instrument and a fixed return is not guaranteed. Look at the past performance of various funds that are on offer before making your selection. This information is usually available on company Websites. Also, stay clear of a plan if its funds have consistently underperformed the market.

Yateesh Srivastava is Chief Marketing Officer, Aegon Religare Life Insurance