Last Updated on April 6, 2020 by Gopal Gidwani
Unit Linked Insurance Plan (ULIP) can be a financial product, which can allow you to meet your life goals, planning your children’s wedding, funding their education, buying a new house or a car, and so forth. Apart from letting you achieve your dreams, a ULIP policy can be the right choice if you are looking for dual-benefits, such as insurance and investment under a single roof. With ULIP insurance, you can safeguard the future of your loved ones and achieve your financial goals with the investment component under a ULIP policy.
The on-going tenure of a ULIP policy can be termed as the lock-in period. During the lock-in period, you might not be able to liquidate your assets until the completion of five years. While the minimum tenure of the ULIP policy can be five years, you can extend the tenure after the fifth year. As a policyholder, it can be essential to choose the tenure of your ULIP policy based on your financial goals. Your short-term goals can be your child’s education, buying a new house, and so on. Your long-term goals can be your child’s dream wedding, comfortable retirement, etc.
After analysing your financial goals, let’s begin by understanding how to select the tenure of your ULIP plan.
1) Short-term ULIP investment
The minimum tenure of a ULIP policy can be between 5-10 years. If you are looking forward to fulfilling your short-term goals, staying invested in a ULIP policy for a shorter duration can be helpful. The primary reasons for a short-term investment in a ULIP policy can be as follows:
a) Fulfilling your or your family’s short-term goals
b) Not risking your invested capital for more than five years
Although a short-term investment can be beneficial, it might have a major disadvantage of market volatility. When you opt for a short-term investment, you might park your funds under only one type of a ULIP fund. Since your money stays fixated in the same spot, the risk can be relatively high. Moreover, the short duration might not be able to hold the risk as well as the impacts of inflation.
2) Long-term ULIP investment
Typically, a ULIP policy is a long-term investment. Since it shows a steady growth of your corpus over the due course, it can be less-risky and stable as compared to short-term investment. A ULIP policy is a market-linked product. But, you can effectively mitigate the risks when you stay invested for a long duration. To secure your invested capital from market volatility, you can switch between funds and achieve the desired ULIP plan returns based on the current market scenario.
When you are young, you can start your ULIP investment with equity funds due to minimal financial responsibilities and a high-risk appetite. When you invest in equity funds, you can generate relatively high returns. As you grow old, your risk appetite can gradually recede due to the rise in financial dependents in your family. During this stage, you can move your assets to debt funds and receive moderate returns.
To conclude, there might not be a particular answer to know an ideal ULIP tenure. As an investor, you should consider your goal and choose the ULIP tenure. It should align with your goals and allow the accumulation of your funds to meet those goals. However, see to it that you invest in a ULIP policy at a young age. An early investment can let you build a high corpus since you might have a significant amount of time in your hands to reach your goals.