You now have a wide range of choices when it comes to investment options. As the choices increase, so does the confusion. It is not possible to know everything so this confusion makes you decide based on perception.
Perception, however, can be based on experiences rather than information, as information is fluid and constantly changing. In the case of ULIP investment, investor’s perception has been defined mostly by prior experiences and published articles.
Though for some ULIP could be good, bad or average investment, you should choose ULIP as per your investment needs.
Factors Affecting Investor’s Perceptions on ULIPs
Every investment instrument comes with a specific set of features and options to help you invest for specific goals. ULIPs are the same and could be the best choice for certain goals, while not so good for others.
Here are some of the most influential factors in your decision about ULIP investments and facts about them simplified:
1. Returns from ULIP Investment
Your perception about returns from ULIP could range between – returns are good, and returns are not so good. However, the ULIP provide adequate flexibility for investors to maximise their returns.
Since ULIP investments are linked to the market, returns are not guaranteed. But if you manage your investment with a disciplined approach and give enough time for your money to grow, ULIPs can offer better returns.
Returns are also determined by your ability to invest in high-risk assets, for example, equity funds. But, taking additional risk is not the only factor to derive higher returns for you. You also want to manage your investment risk to maximise and stabilize your returns.
Studies have shown that more than 40 per cent have witnessed their wealth grow with ULIP.
Benefits of ULIP
General perception with ULIPs is that there is a small life insurance amount available with ULIP, which makes it an expensive investment proposition. Some may even suggest going for a separate term cover and invest in a mutual fund, instead of a ULIP.
The reality, however, could be a little more complicated and beneficial than that.
ULIP have many unique benefits that are not available with other investment plans. For example, a guaranteed death benefit ensures that your family will receive a minimum sum of money in the case of your early death.
Another important benefit, also associated with the life insurance cover in the plan is the goal protection benefit. This is one option, if you choose, will not only ensure a minimum death benefit to your family but also carry on the investment to provide the intended maturity value.
This benefit helps you protect your family’s goals from your early demise. Additionally, ULIP add bonus units to your portfolio if you invest for a longer term.
Finally, ULIPs also offer you tax benefits. You can claim a deduction of up to Rs 1.5 lakhs under section 80C on the money invested every year. If you keep your total annual investment into ULIP below Rs 2.5 lakhs, the maturity value and withdrawals will also be tax-free.
2. Risk Factor in ULIP Investment
The general perception about ULIP investment is that these are high-risk products. This could be because we already have a lot of long-term safe investment options. Thus, many advisors prefer to position ULIP as an equity investment instrument, which itself implies higher risk.
However, ULIP are suitable for all risk types. The fact is that ULIPs have multiple asset options for investors including high-growth equity funds. But, if you are a safe investor or just want to avoid volatile equity markets, ULIPs also have the option of well-diversified debt and liquid funds.
Thus, while your investment will remain linked to the market, you can hope to keep the growth less volatile, i.e. less risky.
3. Charges In ULIP
Another factor that can affect an investor’s decision is the price of the investment, that is how much it will cost to the investor. Charges are the costs your policy will incur. You don’t want a policy that is heavy on the pocket and brings with itself a range of charges.
ULIPs is always seen as a costly affair. According to the studies, most people say that the premium associated is high or very high.
But this is not at all the case in today’s scenario. Contrary to general belief, ULIPs are easy on the pocket. The charges have been reduced considerably over the past few years. Fund management charges also remain lower than 1.35 per cent as regulated by IRDAI.
Policies such as Canara HSBC Oriental Bank of Commerce Life Insurance Invest 4G has no premium allocation, policy administration and switching costs. It will also return the mortality charges it collects if you survive the policy term.
4. Cost of Switching Between Funds in ULIPs
The general perception about ULIPs is that you can have very few free switches throughout the policy term. After free switches moving your money between funds will become expensive. Yes, some plans charge you after free switches, but here are the facts you should consider at the same time:
a) You may not need to actively switch between funds manuallyb) Automated portfolio management options are better for a disciplined portfolio managementc) Few ULIP, especially online ULIP, allow unlimited free switches
This is a unique feature of ULIPs and the best way to use it is with an automated handle. that your portfolio follows market performance without fail and helps you manage your risk and maximise growth.
5. Flexibility of Withdrawals – Liquidity in ULIPs
Liquidity is an important factor in any investment. ULIP investment, being a life insurance plan, has a perception of being illiquid. However, the reality is somewhat different when it comes to flexibility with withdrawals and everything else.
You have the option to choose the funds as per your risk appetite in ULIP. They also give you the freedom to choose the ratio in which you want to allot funds in various securities.
You can also withdraw money partially after the lock-in period of the policy. ULIPs provide partial withdrawal option. The Lock-in period in ULIP is of five years and it has the following effect on your investment:
a) No withdrawals are allowed within the lock-in periodb) The policy cannot be surrendered within the lock-in periodc) The policy will acquire paid-up value if you stop paying the due premiums within this period
Thus, within the lock-in period, the policy remains somewhat illiquid and the only death benefit is payable. However, after the five year lock-in period, you can start to withdraw money from the policy.
There are various perceptions about ULIPs that may affect your investment decisions. However, used right, ULIPs carry a lot of advantages for long-term investors.