5 Myths you were told about ULIPs & the Facts

Who doesn’t want a life full of adventure and a bank balance that’s overflowing with zeroes? In other words, life is enjoyed to the fullest when we have money in the bank. If your answer is affirmative, but you lack in terms of bank balance, you should set your sights on Unit Linked Insurance Plans (ULIPs).

Simply saving isn’t going to complete your financial requirements. You need to leverage an investment tool that can offer a combination of life risk protection and tax efficient, low-cost investment benefits. For all practical purposes, ULIPs are ideal for individuals whose investment horizon is at least 15 years.

However, there are several misconceptions and myths surrounding how ULIPs work, due to which, people aren’t receptive to this high-performing investment tool. Let us take a closer look at a few myths and debunk them for good.

Myth #1: ULIPs are Costly

Reality: Hold on. ULIPs aren’t expensive anymore. While initially, the ULIP charges were between 6% and 10%, the annual charges have been reduced to 3% for the first 10 years of holding a stand, by IRDA. In addition, the annual charges are 2.25% for the subsequent years, evenly distributed over the lock-in period of 5 years.

Moreover, ULIPs have undergone significant changes since 2008. Earlier perceived as rigid financial investment tools, ULIP plans now provide a variety of flexible fund allocation and withdrawal options. Therefore, it would be factually incorrect to consider ULIPs as non-liquid instruments.

Myth #2: ULIPs Are Risky Investment Instruments

Reality: Many investors don’t factor their risk appetite while investing in market-linked tools. While some investors have a larger tolerance towards market volatility and choose to invest in a high-risk fund, others find solace in investing in less risky alternatives. Among available fund options, equities are the riskiest in terms of market-linked variances, while debt funds are known to be conservative and comparatively less prone to market volatility.

Then there is the option of balanced funds, which are a healthy combination of debt and equity. Therefore, you can switch between a variety of fund options based on your risk appetite and changing lifestyle. Moreover, the risk in case of ULIPs is relatively lower than that of mutual funds or ELSS (Equity Linked Saving Scheme).

Myth #3: Switching Charges Are High

Reality: This is yet another myth with no substance. Switches are nothing, but provisions offered to policyholders to manage their investment allocations between different types of funds. Therefore, you are at liberty to allocate either all or a portion of your investments, in the form of units from equity to debt or vice versa. In short, switches are a boon in disguise as they allow you to distance yourself from loss-making funds. Net Asset Value (NAV) of schemes is calculated and declared regularly so that you can have an eagle’s eye on the performance of schemes. And yes, many leading insurers like Max Life Insurance allow switching between different funds without any extra charges.

Myth #4: Life Cover Decreases with Market Volatility

Reality: Don’t be misled by this misconception. If we talk about ULIP investments in a bear market scenario, usually there is significant market volatility. However, the life cover remains unaffected. In case, the policyholder passes away; your nominee would receive the higher of the two values – fund value of the ULIP or life cover as a death benefit.

While there’s always the option of surrendering your ULIPs, it is not advisable since ULIP investments realize their capital appreciation value only after the maturity date. If you surrender your ULIPs before the maturity date, you will receive diminished capital appreciation benefits.

Myth #5: ULIPs Are Not for Investing Surplus Funds

Reality: You have an option to level up your premium with ULIPs. The benefits of these top-up premiums are the same as those of regular premiums. Further, you are at complete liberty to pay top-up premiums anytime within the policy period. Unlike equity oriented mutual funds, ULIPs don’t attract dividend distribution tax.

In conclusion, ULIPs are a combination of two benefits – capital appreciation and insurance cover. These plans come with great flexibility and impressive features along with the option to make the ULIP payment online. Now that we had separated wheat from the chaff and debunked some of the most illogical myths out there, what’s stopping you from investing in ULIPs? Start investing in ULIPs. Stay smart. Cheers!

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