Have you considered investing in a ULIP? For the still-uninitiated, it means a Unit-Linked Investment Plan. Why is this plan different? It offers a unique mixture of insurance and investments. You can obtain insurance coverage for the duration of the policy while a major chunk of your premium is allocated for investments in market-linked instruments depending on your risk appetite and preferences.
While it sounds like a win-win proposition for several investors (and often is), there are several myths associated with ULIPs that should be busted in order to help you take an informed investment decision. Here’s taking a look at some of them in this article.
Here are some of the prevalent myths about ULIPs that you must have heard about at some point of time.
This is nothing but a misnomer. A ULIP works in a manner where you have to pay premiums to the insurance company every month, year, or quarter, depending on the policy structure and your preferences.
Each time you pay this premium, most of the money is invested in your chosen funds after deducting service charges for life insurance coverage, fund management, and so on. From the 1st of September, 2010, the IRDAI (Insurance Regulatory and Development Authority of India) has capped these charges (excluding those for life insurance coverage) at 2.25% for ULIPs if customers stay with the financial product for 10+ years. There are several plans available these days which enable lower purchase costs for customers. Compare available policies and go for the one which suits your budget.
Another misconception that is often tagged to ULIPs is that they are among the riskiest investment bets out there. However, the reality is that they are comparatively safer than many of their equity-linked counterparts.
The life insurance coverage in this plan remains fixed. You will get multiple fund options to invest in and can allocate investments as per your risk appetite and goals. You can choose equity, debt, or even balanced (mix of debt and equity) funds as per your preferences. You can switch funds whenever you wish or change your allocation strategy with the assistance of your fund manager. Hence, you have a measure of control over your investment and can switch tack in case of market fluctuations or disruptions.
ULIPs do not offer subpar returns as is often wrongfully projected. The returns depend on your chosen asset classes and funds along with market movements. Switching funds strategically and choosing a good mix of funds will help you get optimal returns over the longer haul. At the same time, you also get insurance coverage simultaneously. In the long run, the returns are quite competitive as you will find out.
Of course, you should only invest in a ULIP for medium to long-term goals. The lock-in period of these policies is five years, after which you can easily surrender your policy. In case you opt for full withdrawal before policy maturity, then you will not have to pay any exit load/surrender costs. You will get the fund value instead. However, you should look at staying invested for a longer duration in order to reap benefits through the power of compounding.
Agreed, ULIPs are linked to equity markets. However, this does not mean that your life coverage will go down with a dip in the market. It is not impacted by any market movements and stays fixed. In case of the policyholder’s unfortunate demise within the tenure of the plan, the policy will pay out either the fund value or life coverage amount (whichever is more) to his/her nominees.
This is one of the biggest myths surrounding ULIPs today. Do note that you can always use surplus or additional funds to top-up your current policy. You will get tax benefits just as in the case of regular premiums. You can pay these top-up premiums multiple times as per your preferences throughout the policy period.
Of course, accidental coverage may be necessary in many cases. Life insurance plans which have accidental death coverage are helpful in specific scenarios where accidents lead to fatalities or disabilities, necessitating financial support for the family in question. However, it is not true that ULIPs do not offer accidental coverage. Alongside, you can choose add-on covers for your life insurance coverage component to enhance your financial protection against risks. Accidental death benefit riders can be chosen in this case.
As can be seen, there are several wrongful perceptions and myths that are often attached to ULIPs, which are otherwise sound investment options for people at various stages of life. With the right strategy and a seasoned fund manager’s guidance, they can turn into game-changing investments to secure your future and meet other objectives seamlessly.
How can I maximize returns on my ULIP investment?
You can maximize returns on your ULIP investment by staying invested for the long term. This will help you benefit from the power of compounding. Additionally, choose your investment funds carefully, going by market trends and patterns. You should keep reviewing your portfolio and switching funds to earn higher returns over a certain duration.
Are ULIPs only for investment and not suitable for insurance needs?
ULIPs are not just for investment purposes, but also take care of your insurance requirements. They offer decent life insurance coverage which helps create a financial safety net for your family in the event of your unfortunate demise within the policy period.
Can I withdraw money from my ULIP before the lock-in period? What are the surrender charges?
No, you cannot withdraw money from your ULIP prior to the conclusion of the lock-in period of five years. You can choose to surrender your policy before the lock-in period and the insurance company may deduct the discontinuance fee from the amount accumulated. This will be moved to a DP (discontinuance policy) fund and you will get this amount only after the conclusion of the lock-in period.
Is it possible to surrender a ULIP before the lock-in period?
Yes, you can surrender a ULIP before the lock-in period. However, your accumulated amount will be impacted, since the discontinuance fee will be deducted. At the same time, the amount will be shifted to a discontinuance policy (DP) fund and you will get it only after the lock-in period ends.
Can I use ULIPs for short-term financial goals? How do I choose a plan for a specific goal?
You can use ULIPs for meeting your short-term financial objectives, provided your definition of short term is at least five years. This is because ULIPs have lock-in periods of five years. Hence, you should plan accordingly in terms of meeting your financial targets and other objectives. You should choose a plan depending on your preferred investment timeline, risk appetite (check the funds that it invests in and the fund options) and the coverage that you require (check the life insurance coverage amount). Also check the fund charges, fund manager’s expertise, performance of the funds earlier and other aspects carefully before deciding.
