Insurance and investment benefits within one plan? Yes, you read that right. It is possible with ULIP plans.
Also known as Unit Linked Insurance Plan, ULIP is one such financial instrument that performs insurance and investment functions. A small portion of the premium goes into the life insurance component, and the remainder is spent on different investment instruments. The insurer utilizes this investment in a range of eligible shares in different proportions of debt and equity funds. The returns on the investments depend on the returns you reap from the funds you have invested in.
How does the ULIP plan work?
A ULIP plan comes with a lock-in period of 5 years (more than 5 years is also available with no lock-in), where you pay the plan’s premium, a part of which goes to life insurance. The remainder is invested in the funds you have chosen (equity, debt, or hybrid) depending upon your risk appetite.
Investors seeking lower risk opt for debt funds, while those with higher risk appetite would want equity investments. Besides, you have the flexibility – based on circumstantial dynamics, as you can move between funds to not lose out on better returns.
There is also a death benefit in ULIP wherein the beneficiary receives a pre-defined sum assured in case of the policyholder’s death during the policy term. Apart from this, investing in a ULIP plan develops the habit of systematic savings and gives tax-saving benefits as per Section 80C of the Income Tax Act.
6 ULIP myths that should be shunned away.
Myth 1: ULIP Plans do not provide good returns.
Fact: They provide Insurance and investment cover under one plan and should not be confused with pure investment instruments. Insurance protection is also a benefit of ULIPs, something that no other pure financial investment instruments do. Given these benefits, you can understand that the returns they offer are highly competitive. ULIPs are suitable for your financial profile if you can choose an investment period longer than five years.
Myth 2: One cannot exit a ULIP plan after purchase.
Fact: If you make a complete withdrawal before the policy expires, no surrender or exit load costs will be incurred; instead, the full fund value will be paid to you. However, it is advisable not to exit before the minimum five-year lock-in period expires so that you can reap maximum returns as a result of capital appreciation and the power of compounding. The goal of investing in ULIP is to promote the habit of disciplined savings.
Myth 3: ULIP life cover depends upon market fluctuations.
Fact: Contrary to this belief, the life cover does not depend upon the market fluctuations. There is no decrease or dip in the life cover if the market conditions are adverse. In case of the policyholder’s demise, the beneficiary gets the sum assured as defined in the plan terms without any depreciation.
Myth 4: Investing in a ULIP plan is very risky.
Fact: ULIP is, in fact, the most flexible instrument that you can invest in as it gives vast opportunities to choose the types and the number of funds you want to invest in. If you have a higher risk appetite and have no liabilities, you can invest in a fast-growing fund (equity). On the other hand, you can invest in debt funds if you have a lower risk appetite. The choice is yours.
Myth 5: Switching between funds incurs heavy charges.
Fact: Switching is not expensive. Many insurers allow you a certain fixed number of switches during a financial year, without any charges. However, the exact number of times you will be allowed to switch depends upon the terms and conditions of your chosen plan. Better understand this benefit before buying one.
Myth 6: ULIP plans do not allow investing additional funds.
Fact: You can top up your existing policy with the additional funds you have and incur tax benefits. You can top up on your premiums several times during the tenure as per the funds at your disposal.
To further shun your doubts and myths, it can be asserted that there are different types of insurances in India.
But what makes a ULIP plan unique is that it is a smart financial instrument that serves the purpose of giving a life cover and multiplying your money manifold. There are various types of ULIP plans in India (ULIP plan for retirement, wealth creation, and children) offered by trusted insurers. However, aspiring investors should consider various aspects like the lock-in period, the policy’s maturity value, and maturity bonus before making any investment.
Lastly, the earlier you buy a ULIP, the better it is, as the power of compounding is an amazing asset multiplier here. Make sure you understand the truth about ULIP and avoid believing in any related myth to gain good returns over the long run.