Unit Linked Insurance Plans (ULIPs) are a great product offering that combines benefits of insurance and investment in one instrument.
Unit Linked Insurance Plans (ULIPs) are a great product offering that combines benefits of insurance and investment in one instrument. However, there are several myths floating around ULIPs, stemming from the misconception about their objectives, liquidity, returns, functioning, and pricing. Here, we bust some of these myths:
MYTH 1: ULIPs have higher costs
Reality: Most people believe ULIPs are costly investment instrument when compared to other products, primarily because of the high premium allocation and fund management charges. But these charges were applicable way back in 2008 and ULIPs have undergone significant changes since then. With the introduction of low cost ULIPs, the charges are much lower than before. Earlier, the charges were as high as 6-10%. However, IRDAI brought down the annual charges to 3% for the first 10 years of holding and 2.25% for more than 10 years.
MYTH 2: ULIPs are risky instruments
Reality: The second myth is that ULIPs are a risky investment product as they only invest in the equity market. However, you can choose the level of risk you wish to take by selecting funds with different objectives. You can choose an aggressive fund if you are a risk-taker or settle for a conservative fund by settling for a debt-oriented fund. Alternatively, you can also opt for a balanced fund (i.e., a mix of equity and debt fund). In ULIPs, you also have the option to switch between funds based on your lifestyle and changing risk appetite. For example, during periods of volatility, you can move your investment from an aggressive or balanced fund to a debt/liquid fund.
MYTH 3: ULIPs does not allow investment of surplus funds
Reality: You can take a ULIP with a lower premium and later top it up when surplus funds are available. Top-up premiums have the same tax benefits as regular premiums. You can pay top-up premiums anytime during the tenure of the existing ULIP policy.
MYTH 4: ULIPs do not allow discontinuation
Reality: As ULIPs can be discontinued with a minimum lock period of 5 years, most people have been misled into believing the instrument cannot be discontinued at all. No surrender charges are levied after the completion of five years.
MYTH 5: Life cover decreases with market volatility
Reality: Some investors believe that because ULIPs are linked to equities, life cover decreases as market dips. But, this is not true. The life cover remains the same even in the case of a bear market. ULIPs either pay the complete life cover or the fund value, whichever is higher, if the person assured passes away.
MYTH 6: ULIPs do not provide health and accident cover
Reality: Contrary to this myth, ULIPs come with twin benefits of insurance and investment. Just like other insurance options, ULIPs too have rider options. Most common ones being Accidental Death Benefit (ADB), Waiver of Premium (WOP), Family Income Benefit, Hospital Cash Benefit (HCB) etc.
Moreover, since partial withdrawals are available, additional cash requirements in such extremities or calamities can be taken care of.
To sum up, ULIPs are modern yet traditional investment option. The kind of flexibility offered and the ease with which it works, along with those current requirements is something which can be obtained only by good financial planners. If you do not wish to get into the hassles of individual planning, a ULIP with few riders may be the solution.
The author is CEO & Co-founder, Policybazaar.com. The views expressed here are personal.