Myths and rumours have been a part of our lives since the advent of human civilization. At times, these myths help us survive the unknown, however, many times they also hold us from achieving the best.
For example, popular myths about a great investment option may hold you back from using it to achieve your goals. Unit-linked insurance plans or ULIPs are also one such investment plans, which suffer a long list of myths due to misunderstanding and lack of awareness.
Nowadays, ULIPs are one of the most cost-effective, flexible and tax-efficient investment plans in India. But it is likely that you may have never invested in ULIPs due to one of the following myths associated with them:
Myth 1: ULIPs are Expensive
ULIPs are one of the most cost-effective investments in India, especially the online ULIP plans. Online ULIP plans like Invest 4G from Canara HSBC Oriental Bank of Commerce Life Insurance only applies two charges to your policy:
1. Fund Management Charge (FMC) &
2. Mortality charge (for the life cover amount in the policy)
The FMC has been capped at 1.35% of the fund value by the industry regulator IRDAI. On the other hand, the mortality charge is a nominal amount that also goes away after few years.
The mortality charge is applicable due to the life cover in the policy. The life cover is the difference between the guaranteed sum assured and the available corpus in your ULIP plan. Thus, the moment your corpus outgrows the guaranteed sum assured, the mortality charge becomes zero.
Learn more about mortality charges in a ULIP.
Beyond that, you can even choose to receive the deducted mortality charges back upon maturity. Thus, FMC would be the only cost associated with your ULIP investment.
At the same time, while it is inexpensive to invest in ULIPs, it is also affordable. For example, Invest 4G ULIP plan, allows you to start with a minimum investment of Rs. 24,000 p.a. or about Rs. 2000 p.m.
Myth 2: ULIPs are Risky
ULIP plans are like a modern sedan that can do 50 kmph or 150 kmph, depending on the road and preference you have. If you want to cover great distances you can take the highways and drive at 150 kmph. However, if you want to visit your relative a few blocks away, you will take a town road and drive slower.
Similarly, ULIPs provide you with multiple risk options:
- Equity funds for high-risk-high-return investment
- Debt funds for low-risk-stable-return investment
- Balanced Fund if you want to choose a middle path instead of the extreme ends
- Liquid Fund for the times when you just need to preserve your capital
Also, you have the option to switch between these fund options at any time you want to switch from high to low-risk investment. In fact, with Invest 4G ULIP plan you can automate this switch so that your ULIP investment automatically, shifts the gears to lower the risk. This option is called automatic portfolio management strategies.
Myth 3: ULIPs don’t Offer Good Returns
Once again, ULIPs are similar to your car. If you drive on a good highway you can more likely maintain a higher speed and arrive at your destination in much comfort. However, if the highway is bumpy, so will be your ride, regardless of how good your car is.
Returns in ULIP plans depend on the performance of the market forces, especially if you are investing in equity or a balanced fund. If you want a more stable return profile, debt and liquid funds are better choices.
However, a better mode of choosing your fund is based on the time you have for your goal and your risk appetite. For example, if you can invest for 10 years, equity funds are a good place to start. But, if you have less than 5 years left, you need to switch to debt funds.
Myth 4: Life Cover Decreases if the Markets Hit Low
The fact is your life cover in ULIP policy is not affected by the fund performance or market movements. The reason behind this safety of life cover is the mortality charge and how it is applied to the policy.
For instance, imagine you have a ULIP policy with a life cove (guaranteed sum assured) of Rs. 20 Lakhs. Consider this cover as a term insurance cover. The mortality charge applicable to your policy could be about Rs. 2000 p.a. if your age is near 30. The mortality charge is deducted out of your fund value every month.
Thus, your ULIP has two distinct components:
- Life insurance cover
- Investment folio
Since the premium for the life cover is separate from the investment portfolio, your life cover remains stable regardless of the performance of your investments.
Myth 5: Returns are Doubled in a Short Period
Almost every investor who is eligible for buying a life insurance plan would be fighting to invest in ULIPs if this was true. The return on your investment in the ULIP plan is dependent on the following factors:
1. Market performance
2. Type of fund you invested in
It may also be affected by the frequency of your investment, especially if you invest in equity funds. For example, SIP investors may face lower return volatility than lump-sum investors.
Learn the difference between a ULIP and SIP.
So, there is no guarantee of returns in ULIPs. But you can invest as per your appetite for digesting the bumps in the market.
Myth 6: ULIP does not Provide Sufficient Life Cover
ULIP being an investment plan is only supposed to provide financial safety to the specific goal you are trying to achieve. For example, your goal is to build a corpus of Rs. 45 lakhs for your child’s higher education in 15 years. If you use a ULIP plan to build this corpus, you are providing financial safety to this goal of your child.
Meaning, if anything happens to you before achieving this goal, your child will still get the promised corpus for his/her education. Thus, the ULIP plan protects only specific financial goals.
You need a term insurance plan if you want to protect your family’s financial needs. The term insurance plan will not only provide adequate financial protection but will also be more cost-efficient.
For example, a Sum Assured of one crore term insurance costs Rs. 10,000 to 15,000 annually if you are 30 years old. However, a ULIP plan with Rs. 1 Crore life cover would need an annual premium of about Rs. 10 lakhs.
Myth 7: ULIPs cannot be Discontinued
Although you are likely to receive better benefits if you continue your investment for the entire term, you can discontinue the investment midway if necessary. The only period in which you should avoid discontinuing the policy is the lock-in period, which is five years long.
If you stop investing in the ULIP policy in the first five years, the policy acquires a surrender value. The surrender value could be less than the invested value of the policy, based on the number of paid premiums.
If you discontinue your policy after the lock-in period of 5 years, the policy can continue without a break.
Myth 8: ULIPs do not Allow Investment of Surplus Funds
ULIP plan allows top-up investments throughout the year, even after you have paid the entire due premium for that year. However, it is not advisable as any investment which exceeds 10% of the life cover amount does not get any tax benefits in ULIPs.
For example, if you have a ULIP policy with a life cover (sum assured) of Rs. 10 Lakh, and an annual premium is Rs. 80,000, you can make an additional investment of Rs. 20,000 per year without consequences. However, if you invest Rs. 30,000, the extra Rs. 10,000 will not receive the tax deduction either under section 80C or at maturity.
Thus, you are not advised to invest the ad hoc surplus income to ULIP policy, even though you can.
Myth 9: Premiums of ULIPs are to be Paid for a Limited Tenure
In the ULIPs plan, there is an option to pay policy premium either for a limited period or go for the entire policy term. However, in any case, it is necessary to invest in the plan for at least five years. This will allow your policy to continue without acquiring cash value.
Otherwise, unless you have selected a premium payment tenure less than the policy tenure, you should continue investing until you achieve your goal.