Misinformation or partial information, and unfounded myths can do much damage to a product or service. And that’s precisely what has happened in the case of ULIPs.
Let’s go step by step.
What Is A ULIP Plan?
A ULIP (Unit Linked Insurance Policy) is a versatile insurance product that addresses fundamental needs and at the same time, provides a dual benefit of Life insurance and Investment.
Sounds like a great product, right? Then, why are people skeptical about investing in ULIPs?
This is due to the many ULIP myths floating around. In fact, these ULIP myths often cause individuals to surrender their policy before it realizes its true potential. And they lose out on all the benefits.
Let’s look at the top ULIP myths and bust them all.
Myth #1: ULIP is expensive
An extremely popular ULIP myth is that ULIPs are an expensive affair. This was true in the past. At that time, premium allocation charges were subtracted from the premium paid by a policyholder, thereby reducing the initial investment amount. Then, fund allocation charges were deducted from the amounts invested across different funds, thereby reducing the investment amount in those funds. Thus, the overall returns from a ULIP were significantly impacted. For e.g., Seema invested INR 1,00,000 in a ULIP with a premium allocation charge of 10% and a fund allocation charge of 2%. This would amount to INR 10,000 as premium allocation charges and INR 2000 as fund allocation charges. When you deduct these amounts from Seema’s investment amount, she is left with INR 88,000 only to invest. She loses out returns on the 12,000 rupees she has spent as charges.
The scenario today is quite the opposite. Earlier premium allocation and fund management charges were almost 6-10%. Today low cost ULIPs have charges approximately as low as between 0% to 5% (for the first 10 years of holding), making this tool affordable for all. If you check online, some options are just amazing.
Myth #2: Once you invest, you’re stuck
Did you know that ULIPs are the most flexible investment? You can switch your funds depending on your risk appetite or your need at a particular life stage? Let us understand in detail. Let’s consider the example of 26 year old Kavya who has just begun her career in a bank. She invests in a ULIP that offers high-risk equity and low-risk debt funds, allocating 80% to equity and 20% to debt, aligned with her risk appetite. When she reaches her mid-40s and her family responsibilities increase, her risk appetite will change. Here, ULIP’s flexibility comes into play: she shifts from 80% equity to 40%, favouring stability. As she nears retirement, her risk appetite diminishes, and she shifts to 10% equity and 90% debt to preserve wealth. Thus, ULIPs let you adjust fund allocations based on evolving risk appetite and goals, catering to life stages like Kavya's ambitious youth, balanced mid-life, and conservative retirement planning.
So, depending upon your need at the time, you can switch funds. Great, isn’t it?
Myth #3: ULIP is risky
The top ULIP myth is that it is risky. This is because the investment arm of the ULIP is linked to equities. This is a classic case of partial knowledge. Yes, ULIPs are linked to the market, but did you know that you can choose a plan that conforms to your risk appetite? Funds operate with different objectives. If you are conservative, you can opt for debt funds. If you belong to the ‘risk hai to ishq hai’ category, you can go all out and opt for the most aggressive equity linked fund. And if you belong to the category which wants to avail the best of both worlds, then you have the balanced funds. The best part – while part of your money is invested in market linked tools, the balance makes up your life insurance.
Myth #4: ULIPs fetch lower returns than mutual funds
In a way, this is like comparing apples to oranges. Mutual funds are a tool that operates with the goal of creating wealth for you. ULIPs on the other hand, offers investment options but their primary goal is to insure your life. That said, with careful planning, you can choose a good selection of funds and switching funds at opportune times will yield great returns. So next time you compare returns from ULIPs with those from mutual funds, be sure to add the insurance cover ULIPs offer you. You will realize that when you look at the larger picture, ULIPs are sharper!
Myth #5: Surrendering a ULIP plan early is a bad decision
This is not true. After the mandatory lock-in period of five years is over, you can surrender your ULIP before maturity. You can make a full withdrawal before the plan matures and receive the fund value. You will not be charged with any exit penalties. However, you must ensure that you don’t surrender before the mandatory five-year lock-in period of ULIPs. However, it is advisable that you remain invested for the long run in order to maximize returns.
Now that these ULIP myths are busted, you can go ahead and invest in one right away. Investing in a ULIP is not difficult.
How to invest in ULIP plans?
All it takes is three simple steps.
1) Go online and check out the various options available.
2) Compare and contrast. Check for substantial life cover, extended investment period, charges levied, and tax benefits offered.
3) Consider your financial goals. These could include children’s higher education, your retirement plan, and so on. Evaluate your risk appetite. Choose a plan that aligns with your needs and you are all set!
While there are plenty of options to choose from, IndiaFirst Life offers three plans that provide life insurance cover, investment growth, and a choice of multiple investment strategies to achieve your financial goals. Choose from IndiaFirst Life Radiance Smart Invest Plan, IndiaFirst Life Wealth Maximizer Plan, and IndiaFirst Money Balance Plan.
ULIPs help you create wealth and insure your life, helping you protect those you love. This makes a strong case for including this tool in your asset portfolio.
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