ULIPs (Unit Linked Insurance Plans) offer you the combination of both investment and insurance components in a single entity. However, there are a plethora of myths surrounding ULIPs products due to lack of knowledge and understanding of its features & benefits. Here’s a look into some of the common myths and their counterpart reality associated with ULIPs which will help you make informed decisions:

Myth 1: ULIP Plans are Expensive

Fact: There is a prevailing misconception among people that ULIPs are expensive. To understand this, you should be first of all aware of the basic structure of ULIP, wherein your premium is divided into 2 parts. The first part is invested in services like life insurance coverage, fund management, etc. and the second part is invested in the funds of your choice.

Effective 1st September 2010, IRDA (Insurance Regulatory and Development Authority) put a cap on charges (besides the life insurance cover charges) that a life insurance provider can charge on a ULIP at 2.25% if a policyholder stays in a ULIP for a period of more than 10 years.
Capping ULIPs simply means that the cost of buying ULIP via online mode is much lesser compared to before times.

Myth 2: ULIP Plans Offer Market-Linked Returns and Therefore, are Risky Instruments

Fact: The life insurance cover that you buy stays fixed in a ULIP. A typical ULIP will offer you multiple fund options. At the time of buying a ULIP, you can choose your own set of funds you want to invest in.

Depending on your risk appetite, you can opt for debt, equity, balanced funds or a mix of both the equity & debt funds. For instance, HDFC Life Click 2 Invest ULIP offers 8 fund choices to choose from. Besides that, you also have the option to switch your corpus between funds or to direct your future premiums to newly allocated funds. All these changes are possible through a single ULIP without investing in a second product.

Myth 3: ULIP Plans Don’t Yield Satisfactory (Good) Returns

Fact: The return in a ULIP plan is determined based on the fact what is the nature of the movement of underlying funds including debt, equity and your individual funds’ choice. A proper funds’ selection and sensible fund switching at the right time can help you gain maximum returns from these market-linked funds.

ULIPs prominently offer not only an investment opportunity to build funds, but also life cover. By focussing on this particular aspect of ULIP funds, you can conclude that the ULIP returns are quite competitive.

Myth 4: ULIP Exit Procedure is Not Easy Once Purchased

Fact: Before buying a ULIP plan, it’s important for you to understand that you should invest in one focus on medium to long term goals. This is because ULIP plans usually come with a lock-in period of 5 years after which you have the option to surrender your existing policy.

In case you want to make a complete withdrawal before the lock-in period, there won’t be any exit load or surrender charges and you will get your fund value. However, it’s not an encouraging idea to surrender your ULIP plan midway unless there is no alternative source of funds for you.

The structure of ULIP requires you to remain invested in it for long-term if you want capital appreciation and reap maximum returns from your investment. In fact, the power of compounding only helps you in the long run and that’s only possible if your financial goals are defined at the time of buying ULIP.

Myth 5: The Life Insurance Component of ULIP Covers Any Depreciation in the Market

Fact: Market fluctuations don’t affect the life insurance component of a ULIP at all. In case of your unfortunate demise, your existing ULIP plan will either pay either your total fund value or the life cover (whichever is higher) to your nominee.

Myth 6: ULIP Plans Don’t Allow Surplus funds’ Investment

Fact: Your ULIP plan does give you an option to top-up it, above your existing premium amount, using any available surplus funds and avail of tax benefits. You have the freedom to pay the top-up premiums as many times as you want during the policy tenure.

Final Thought:

All in all, ULIP plans are the ideal investment tools to help you achieve your long-term financial goals as it serves as the best wealth creation solution over the long term. Besides the investment component, as a policyholder, you also get access to life insurance component, which means additional financial assistance and security for your loved ones in case you are no more.

By Justin Weinger

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© 2018 Copyright Justin Weinger - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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