Throwing light on investment-linked insurance policies
What's the story
Investment-linked insurance policies (ILIPs) combine the best of both worlds: insurance and investment. They have emerged as a popular choice for Indians.
These policies offer life cover while also investing a portion of your premiums in funds of your choice.
This article demystifies ILIPs and provides actionable tips for navigating them effectively, making it a must-read for anyone looking for the dual benefits of insurance protection and investment growth opportunities.
Risk assessment
Know your risk appetite
Before you even consider ILIPs, you need to evaluate your risk tolerance.
Remember, these policies invest in equity and debt markets, which are inherently volatile.
If you're someone who prefers steady returns and wants to avoid risk, you might not be comfortable with a large portion of your premium being allocated towards equity funds in the ILIP.
Understanding your risk tolerance is crucial to making wise decisions about fund allocation.
Fees and charges
The charges involved
ILIPs are laden with a plethora of charges including but not limited to premium allocation charges, policy administration charges, fund management fees, and mortality charges.
Policyholders need to understand these charges as they can erode the returns on investment.
For example, a high premium allocation charge means that less amount is invested in the initial years, reducing the benefit of the policy.
Investment choices
Flexibility in investment
A key advantage of ILIPs is the flexibility they offer in terms of investment.
Policyholders can opt for equity, debt, or balanced funds for their investments, depending on their risk tolerance and financial objectives.
Most policies also allow for multiple free fund switches every year, enabling investors to actively manage and rebalance their portfolios in line with market fluctuations, without any additional charges.
Performance tracking
Monitoring performance
To make the most of ILIP benefits, actively track fund performance.
Keep an eye on how your funds are doing and don't be afraid to switch things up.
If one of your equity funds is underperforming and a debt fund is doing well, you can reallocate your investments.
Being proactive like this makes it easier to steer ILIPs to your advantage in the long run.