Unit Linked Insurance Plans have become one of the most popular investment schemes in India as they offer a life cover and market-linked returns along with several tax benefits. Naturally, this unique and beneficial mix convinced many to purchase ULIPs. However, it’s important to note that these are primarily long term investment plans and therefore one has to stay invested for a long duration in order to reap its real benefits. If you plan to exit a unit linked insurance plan before the lock-in period of 5 years, you won’t be able to reap good returns on your investment. Here’s why:
ULIP Plans Involve High Costs during the Initial Years
During the initial years, a large portion of the premiums is utilized for paying the agent’s fees, fund management fees, mortality charges, policy administration costs and other such charges. Only a small portion is diverted for investments. Naturally, the returns are likely to be low during the initial years. Hence, if your ULIP agent has assured you that you can exit the policy after three years with sufficient gains, you will eventually find out that it is not financially viable.
Long Term Gains
While ULIPs do offer substantial capital gains, it would be unwise to compare its returns with pure investment schemes. Since it are life insurance cum investment plans, it cannot compete with other investment products in terms of capital gains. However, it does promise to provide financial risk coverage following the policyholder’s death or maturation of the policy. Hence, ULIP investments are only viable over the long term. Therefore, it’s advisable to continue investing for the long-term as you stand to gain much more on your cost if you see the policy through to the end of its term. As time passes, more funds from the plan will be diverted into investment avenues which will bear you their fruit eventually. Additionally, if you have purchased ULIP plans before 1 September 2010, you will receive the sum assured (minus insurer deductions) even if you have defaulted on premiums following the end of the lock-in period.
To Switch or not to Switch?
If you are dissatisfied with the returns of your current unit linked insurance plans, you may be tempted to switch to a newer ULIP, mutual funds or a permanent life insurance policy. However, make sure to take this step only after comparing various parameters such as the cost of investment and the extent of life insurance cover before you surrender. Whether your reason to discontinue your plan is dissatisfaction from the returns or urgent financial needs, it is not a wise thing to do. With ULIP plans like Bajaj Allianz Future Gain and Bajaj Allianz Goal Assure, you can be assured of potentially higher returns and adequate life insurance cover by staying invested for a long period. To know more or to invest in ULIP plans, visit Finserv MARKETS.
Also read in detail about the ULIP tax benefits you can avail with various investment plans available on our platform.
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