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What Is The Premium Redirection Feature In ULIP?

What Is The Premium Redirection Feature In ULIP?

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.

What is a ULIP?

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.

What is premium redirection in a ULIP?

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.

Is it the same as a premium switch?

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.

Why is redirection useful?

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.

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Annual Income (In Lacs)

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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