The ULIP serves individuals, entrepreneurs, and anyone looking for unique financial devices. As
Entrepreneur says, “ULIP is an insurance-cum-investment plan, which possesses all the best components of both the instruments.”
Yet, too many people don’t understand the concept and promise in the ULIP. The ULIP is a high-potential, increasingly popular to solve financial planning problems and bring some considerable financial against.
ULIPs are Unit Linked Insurance plans, blends of life insurance and market-linked investments.
One portion of your premium goes towards life insurance, and the other portion is invested in capital and money markets.
ULIP policyholders pay a premium once a month or once a year. A small amount pays for the administrative and mortality charges of the life insurance policy. The balance invests in your investment plan: an equity fund, balanced fund, debt fund or secured fund, depending on your risk tolerance.
Dispelling 5 common myths about ULIPs and the corresponding realities:
Myth #1: ULIPs are affiliated with equity markets, so they are high risk.
ULIPs are offered with several options. It may take some research, education, and advice, but you can select the investment vehicles you want. Depending on how you feel about risk, you can choose a conventional fund or an accelerated growth fund.
Myth #2: Fluctuating finance markets have a negative effect on your ULIP life coverage.
The life insurance element of the ULIP remains unaffected by investment market fluctuations. Bear markets or bull, your life cover remains the same. If you die, the ULIP pays the life insurance amount or the fund value at the time, whichever is larger.
Myth #3: ULIPs provide weak investment returns.
Because a ULIP is a hybrid plan, you can’t compare it with other pure investment vehicles. It’s not apples and apples. The insurance cover element is an advantage simple investment vehicle do not offer. And, if you consider that advantage, the returns are competitive, especially if the ULIP is held for the long-term.
Myth #4: ULIPs are more expensive than other investment plans because there are many charges.
Revised guidelines of IRDA have ensured the uniform division of charges over the five-year period. They are no longer deducted in the first year. So, more of the premium is invested right from the first year. Moreover, the fees and charges are capped by the IRDA.
Withthe charges evenly distributed over the lock-in period of 5 years, the ULIP policyholder in Now has the opportunity of having a higher amount invested initially. If you consider a ULIP as a long-term investment vehicle that offers multiple options depending upon your investment goals, then it is not expensive at all.
Myth #5: ULIPs are inflexible.
With a ULIP, you have the flexibility to switch from equity to debt and back. You can’t do that in a Mutual Fund. Moreover, the switch does not attract capital gains tax as it does in mutual funds.
A parting thought
Money Today says, “With charges being capped, you are likely to get much better net returns from the new Ulips.” That’s enough to get the attention of people looking for a long-term vehicle for their security.
But, ULIPs can be a bit complicated. So, you need professional input on how to shop and structure your plan. It’s less complicated than you think with the right advice.