These days, there are a variety of investment options that cater to the different needs of individuals. With so many options, it can get confusing to narrow your choices. One financial product that has gained popularity is a Unit Linked Insurance Plan (ULIP). It is not only an investment instrument, it also provides life insurance in the same plan. This unique blend ensures that two key financial aspects of an individual are fulfilled.
Meaning of ULIP
ULIP is life insurance that comes with an investment component. Basically, it is a two-in-one financial instrument. The premiums that you pay for your ULIP are partly used towards life cover and partly towards investment. The life insurance component here ensures that in case you suddenly lose your life during the policy, your nominee will receive the sum assured. This ensures that the financial future of your loved ones is secure even in your absence. The investment component works differently than typical investments. Based on your risk appetite and financial needs, you can choose the funds you want to put your money in. In the long run, ULIP facilitates wealth creation.
The myths of ULIPs vs. the truth
ULIPs have two major components, insurance and investment in a single plan. This confuses people about how ULIPs work exactly. The difficulty in understanding has led to fear amongst investors and led to myths surrounding existing ULIP plans. Here are the common myths that are associated with ULIPs that you should not believe in:
Myth 1- ULIP is a risky investment
ULIP is life insurance with a component of investment attached to it. Fearing the high risk associated with investments, people opt out of investing in them. ULIPs allow you to choose the type of investment based on your risk appetite. If you will take risks, you can put your funds into equity-based ULIPs. On the other hand, if your willingness to take risks is low, there are debt funds that have low risks. Also, there are balanced funds available, where part of the money is in debt and part in equity funds. This leads to moderate risks for moderate returns. A ULIP calculator offers an estimate of returns on the funds you choose for your ULIP. Also, it is one of the few products that allow you to switch your allocation anytime. You can go switch debt to equity and vice versa. This helps the ULIP buyers to make most of the market fluctuations.
Myth 2 – ULIPs do not have fixed life coverage
ULIP is life insurance at its core. Its investment component is directly subjected to market fluctuations. For life insurance, things remain unchanged. No matter how your investments are doing, your life cover will remain untouched. In case of your sudden demise, the nominee will receive the sum assured or the fund value, whichever is higher. This ensures that in any case, the nominee would not receive less than the sum assured. This leaves the nominee relieved that no matter the returns on their investment, their life cover remains unaffected.
Myth 3 – ULIPs offer no add-on riders
ULIP is life insurance at its core. Similar to any other life insurance, you can choose riders on your base plan. Hospital Cash Benefit (HCB), Accidental Death Benefit (ADB), Waiver of Premium (WOP), Family Income Benefit, and Critical Illness Rider are some of the common riders that one can usually buy. These riders do come with additional premiums. Use a ULIP calculator to find the additional premium you have to pay for the add-on riders.
Myth 4 – You cannot invest any surplus in ULIPs
When you bought a ULIP, you invested in funds based on your earnings. If you earn more and will save further, you can also invest the surplus amount in ULIP. You can add the top-up premium anytime and it is utilized like a regular premium.
Myth 5 – You cannot withdraw money from ULIP
Most investments that you buy do not allow you to liquidate your funds during emergencies. You are required to either dissolve your investment completely or pay charges for withdrawals. ULIPs come with a lock-in period of 5 years. After that time, you are eligible for partial withdrawals anytime you want. The myth here was that you cannot withdraw money from ULIP anytime you want. Whereas the reality is that you can avail partial withdrawals after the lock-in period.
Myth 6 – ULIPs are overpriced
When ULIPs were launched, the charges associated with them were difficult to pay for most consumers. This led to a significant decrease in the sales of ULIPs. However, this has changed with time. Insurance companies reformed ULIP plans and have significantly reduced the charges associated with them. When you buy a new ULIP, you find the charges are nominal and some are even eliminated completely.