ULIP is a unique savings cum insurance plan that has a lot to offer. It gives you an opportunity to boost your savings with new age investment options, for the new age investors who want to achieve their long term financial goals. Most of the unit linked insurance plans also come with loyalty additions and wealth boosters. In order to ensure cost efficiency, the IRDA regulations made significant changes with respect to the life cover of ULIPs in 2010. Mostly aimed at rationalization of costs of the policies, changes were made to ratio of annual premium and policy surrender procedures.
Owing to these misbelieves, many policyholders either end up buying a wrong plan or surrender their policy quickly causing loss of money. For several reasons, unit linked life insurance plans are like an elephant in the room that does not get much attention and word. And this lack of conversation around ULIPs has given rise to a number of misconceptions over the years that we will try and break down.
Truth – ULIP used to be one among the expensive plans way back in 2008, but as times changed, there are more and more unit-linked products being offered with lower premiums and better returns. For instance, Invest 4G by Canara HSBC Life Insurance excludes several charges levied by traditional policies along with option to get a return of mortality charges. In addition, fund management fees have reduced considerably and so have the premium charges. The insurance regulator (IRDAI) has capped charges at 3% of gross yield for policies with duration of up to 10 years and 2.25% for those above 10 years.
Truth – ULIPs allow you the flexibility to opt for funds with different objectives, depending upon your risk appetite. With ULIPs, you can select your investment and also switch between them based on the level of risk you are willing to take. Also depending on the circumstances, most ULIP Plans offer a number of free fund switches in a year, wherein you can opt for a conventional low-risk fund, a medium risk or a fast-growing high-risk fund. For instance, an investor in his 20s with fewer financial obligations would be willing to take greater risk for faster and better returns and can choose to invest in equity. On the other hand, an investor nearing his retirement might want to opt for a non-aggressive debt fund for stable returns.
Truth – Life cover portion in ULIPs remain unchanged despite market fluctuations. It is natural to worry about your life cover when ULIPs are linked to the equity market. However, you must know this for a fact that the sum assured would remain unchanged even if the market plunges. Despite a bear market, the life cover component of a unit linked plan stays the same and in case of the policyholder's death, ULIPs recompense the entire life cover or the fund value, whichever is greater.
Truth – ULIPs offer dual benefits of an insurance policy and a savings plan, therefore it would be unfair to compare it to pure investment options or even pure life covers, for that matter. Considering all the advantages of a ULIP plan, you would realize that the returns they provide are quite competitive. In fact, if you have a long-term investment horizon of more than 5 to 7 years, then there might be no better product than a ULIP.
Truth – This is a common misconception surrounding ULIPs in India. However, it is untrue. As an investor, you have the choice to surrender the policy after a determined lock-in period, which is typically five years from the buying of the ULIP product. But it is not advisable that you surrender your policy as soon as the lock-in period ends because ULIPs yield the best returns when invested in for long periods of 15-20 years. Additionally, if you think your funds are not performing well, you may choose to switch your funds.
You, as in investor need to consider unit linked products objectively, taking several factors into consideration such as the surrender value of the policy, loyalty bonuses on offered maturity and the level of cover needed to meet your family requirements. After all, a Unit Linked Insurance Plan is a unique product, and needs a similar approach. It not only safeguards your family but can also help your money grow in the long run.
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