ULIPs are considered one of the most lucrative investment and life insurance avenues. They also have the advantage of multiple tax benefits in just one plan. In the past few years, a lot of ULIPs have become popular in India. Here, we attempt to understand one of the key benefits of a ULIP, premium redirection. But first, we will understand what a ULIP is.
A Unit-Linked Insurance Plan is a combination of life insurance and investment. A part of your premium is utilised for a life insurance cover, while the other part is invested in funds of your choice. As per your risk appetite, you can choose to put your money in debt, equity, or balanced funds. ULIPs also offer a number of tax benefits, making them one of the most promising instruments.
Suppose you have a huge risk appetite and choose to invest in equity oriented funds while purchasing a ULIP. 5 years later, you have accumulated a sizable corpus and you are more or less satisfied with your investment decisions. However, you notice that market conditions do not look very favourable now, and you are worried about depletion of your fund value. You would ideally shift your investment to a fixed income fund and avoid the volatility of the market.
This is where the option of premium redirection comes in. A year into your purchase of the plan, you can redirect premiums in the future amongst different unit funds of the plan in alternate proportions. Your existing fund will not change. The premium will be utilised for buying the new fund which could be equity or debt, based on your decision.
Note that this process will have to be undertaken before your next premium due date. Premium redirection in a ULIP has no bearing on your last premium and is usually not charged either. In one year, you can redirect two premiums, at the most.
No. It is very easy to confuse premium redirection with premium switch in case of a ULIP. However, these are two very different options. A fund switch moves units from one unit linked fund to another within the same ULIP.
For example, you can choose to partially or completely shift units from a debt fund to an equity fund and the other way around. This is a retrospective change which rebalances your earlier investments and does not affect your upcoming investments. For example, you begin with a 50-50 allocation in equity and debt funds. After a few years, you see a great opportunity in equity and want to increase your stakes. You can ask your manager to switch to a 70-30 ratio with equity having the higher share.
On the other hand, premium redirection in a ULIP is a prospective change. It shifts the funds you are going to buy with future premiums. Continuing with the same example, let’s say that a few months post switching your funds, you realize that interest rates are falling and that equity doesn’t look like too great an option for the future. You can ask for all of your premiums in the future to be divided into debt and equity in a 60-40 ratio with debt taking the larger share. Meanwhile, your current units won’t undergo any change.
As an investor, whether you are seasoned or just a beginner, you very well know that the market keeps changing. An investment that you had acquired at a very low rate can shoot up to a very high value in the matter of a few years. This puts you at an advantage. Now, you want to capture more investments with a potential of increasing value. At the same time, you also want to balance your portfolio with debt. For such prospective decisions, premium redirection is the way to go.
Conclusion As the market oscillates between bull and bear, why should your investments stay constant? You should enjoy your freedom to capitalize on opportunities and minimize risks. However, be careful with timing the market, and seek expert guidance if required. If you are a beginner and are still wondering which ULIP to go for, a brilliant option is the Invest 4G plan.
Invest 4G Invest 4G by Canara HSBC Oriental Bank of Commerce Life Insurance gives you a life insurance plan along with a choice of 7 funds to invest in. It also offers Loyalty Additions and Wealth Boosters to maximize your profit. It also gives you the option of partially withdrawing your fund in order to meet emergency situations in life. Plus, it even offers Return of Mortality Charge.