Myths about investing in ULIP Plans

 A Unit Linked Investment Plan or ULIP is a market-linked investment avenue that aggregates the dual benefit of life insurance and market investments. It offers the flexibility to invest in an array of investment instruments such as stocks, bonds etc. A part of the premium paid towards ULIP plans is utilised to provide you with a life cover, while the rest of the corpus is invested in the equity or debt markets according to your risk appetite. Another unique aspect about ULIP plans is that they are goal based investments and can be used to achieve a wide selection of long-term financial goals such as investment planning, insurance planning, retirement planning, child’s education planning, as well as tax planning. 

How do ULIPs work?

The workings of a ULIP plan is simple to comprehend. The premium paid towards ULIP plans is divided into two parts. One part is dedicated to providing a life cover, while the other is invested in the stock market. The insurer pools in money from various policyholders and invests the same in a wide range of funds chosen by them. The investments are managed by fund managers which takes away the need to track investments. Once the money is invested, the corpus is divided into smaller 'units' with a certain face value. The units are allocated to each investor in proportion to the invested amount. The value of each unit at a given point in time is referred to as Net Asset Value (NAV). As the value of the underlying assets increase or decrease, the same is reflected by the NAV.

Myths about ULIPs

Myth 1 – ULIPs are expensive

If you think ULIP investments involve high costs, you are mistaken. The IRDA capped ULIP investment charges (excluding life insurance cover charges) at 2.25% if a customer stays invested for more than 10 years.

Myth 2 – ULIPs carry high risks

In reality, ULIPs offer multiple fund options based on the investor’s risk appetite. Depending on the level of risk you are willing to take, you can opt for equity, debt funds or a balanced fund to invest. Equity funds carry high risks, balanced funds carry medium risk whereas debts funds carry low risks.

Myth 3 – ULIPs don’t offer good returns

This is perhaps the most common myth about ULIPs. In reality, the amount of returns generated by ULIPs are determined by the nature of assets invested in. For e.g. equity investments generate relatively higher returns compared to debt funds.

Myth 4 – Exiting a ULIP policy is difficult

Since ULIPs are a long term investment they come with a lock-in period of 5 years. However, if you wish to withdraw your funds before the lock-in period, you will not incur any surrender or exit load charges. However, it is not a good practice to do so, unless it’s an absolute emergency.

Myth 5 – ULIP life cover decreases if the markets hit a low

While it’s true that ULIPs are market-linked investments, the life cover component of the plan is immune to market fluctuations. Hence, your life cover will stay intact regardless of the market conditions.

Benefits of investing in ULIPs

  1. Tax Benefits – ULIPs offer great tax savings under Section 80C, Section 80CCC and Section 10(10D) of the Income Tax Act. Moreover, they fall under the EEE (Exempt Exempt Exempt) tax exemption category.

  2. Transparency- Important indicators like charge structure, the value of the investment and expected rate of ULIP returns are shared by the insurance company before you buy a plan.

  3. Dual Benefits – You get the dual benefit of life insurance along with market-linked investments from a single scheme. Besides securing the future of your loved ones, you also get the opportunity to gain higher returns and maximize your wealth potential.

  4. Financial Security Post Retirement – Financial security during retirement is essential for peace of mind. Retirement ULIP plans can help you secure the golden years of your life without straining your current budget. By investing a small sum as premium, you can build up a substantial corpus for your retirement.

  5. Flexibility to choose Investment Mix – With ULIP plans, you have the flexibility to choose from a wide selection of fund options based on your risk appetite. If you seek higher returns and have a high-risk appetite, you can invest in equity-based ULIP plans. On the other hand, if you have a low-risk appetite and are satisfied with medium to low returns, you can choose to invest in a debt fund or balanced funds.

  6. Plan for the Crucial Milestones in Life – Given the hybrid nature of ULIPs, it can be utilised to meet the expenses arising out of important milestones in life such as marriage, college education, etc. Hence, ULIPs are a great investment tool for planning your long term financial goals.

ULIP calculator

At Finserv Markets, we provide instant ULIP calculators that will give you an estimate of the life cover and investment corpus you need. The ULIP calculator will consider factors such as time period to achieve your goal, and expected rate of return to calculate the amount you need to invest. Our ULIP calculator will also tell you if you need to invest as a lump sum or at regular intervals to achieve your investment goals.

General FAQs

  1. What is NAVs in ULIPs?

  2. NAV refers to the Net Asset Value of each unit of a ULIP fund at any given point in time. The NAV of ULIP funds varies on a daily basis based on market conditions.

  3. What is the amount that I will receive at the end of the ULIP term?

  4. The amount received at the maturity of a ULIP policy is known as the maturity benefit. This benefit will be equal to the Fund Value at the time of maturity.

  5. What does ULIP redemption mean?

  6. Redemption in ULIPs refers to the encashing of the units as per the current NAV offered by the company. Redemption will be applicable in case of maturity, partial withdrawals, switches, surrender or on payment of death benefit.

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