Insurance plans are important tools that are required for the financial security of your loved ones in case an unexpected incident were to happen, such as a fatal car accident. Traditional plans, like endowment policies, provide insurance benefits to your beneficiaries if you were to lose your life during the policy term.
You may have been warned against using insurance as an investment tool. However, there is no harm if your insurance policy is able to deliver returns along with life cover. This can prove highly beneficial. Such plans are widely available today.
What are Unit Linked Insurance Plans [ULIPs]?
You may have heard about such plans but often wonder what is ULIP exactly? ULIP is a unique insurance plan that offers the dual benefit of life coverage and returns. A certain amount of the premium you pay is used towards insurance coverage. The balance is invested in different financial products, such as debt or equity, to deliver returns on your investment.
Because most people do not clearly understand what is ULIP plan, there are several myths associated with this insurance product. Following are five such myths that need to be busted right away.
- High-cost products
Do you, like most people, think that the costs associated with these insurance plans are too high? Well, this is a misconception. It may be overcome through an understanding of the structure of a ULIP plan. The premium that you pay for your policy is invested in your chosen financial products after the deduction of certain charges, such as fund management and life cover.
In September 1, 2010, the Insurance Regulatory and Development Authority of India [IRDAI] capped such charges to ensure the costs of procuring these plans are reduced. If you remain invested in a ULIP for at least ten years, the insurance company may levy a maximum charge if 2.25% during this period. Most insurance companies also offer excellent benefits and discounts if you choose to purchase the policy online.
- Risk of returns
Because a portion of the insurance premium is invested in financial instruments, the returns are market-driven. This poses a certain risk. However, the truth is that the life cover you acquire remains constant during the entire policy period. Moreover, you may have the option of choosing from different types of funds to invest in. You may choose the financial product where your money will be invested at the time of purchasing the plan.
Based on your risk appetite, you may choose to invest in equities, debt, or balanced funds, which are a mixed of equity and debt. Additionally, you may switch between one instrument and the other based on your financial goals.
The life cover does not decrease in case the financial products do not perform well. In case of your death during the policy tenure, your beneficiaries are eligible to receive the policy benefits. The insurance company will either pay the fund value or the total life cover, whichever is higher.
- Low returns
The return on your investment in a ULIP depends on the performance of the chosen financial instrument. However, when you choose the right funds and make logical and timely switches between products, you may be able to enjoy higher returns.
A ULIP delivers significantly higher returns when you stay invested for a longer period of time. Therefore, most experts recommend using these plans to achieve long-term financial objectives, such as purchasing a luxury vehicle or buying your dream home.
Insurance companies also offer loyalty additions when you stay invested long-term. This helps to increase your accumulated corpus. It also increases the effective return on your investment. Moreover, these insurance plans are eligible for tax benefits under the Income Tax Act, 1961. Only an amount of up to INR 1.5 lakh paid as the premium on a ULIP may be deducted from your taxable income under section 80C of the IT Act. Moreover, the maturity benefits are also tax-exempt under section 10 [10D].
- Exit is difficult
When you choose to purchase a ULIP, it is important to have a medium to long-term investment intention. ULIPs have a lock-in period of five years, which means you cannot exit your investment during this time. At the end of the lock-in period, you may surrender your policy. If you choose to exercise this option, there will be no exit load charges levied if you withdraw the entire amount before the maturity date.
However, it is not advisable to surrender your policy before it matures. To maximize the returns on your investment, it is important remain invested for the long-term. This is because the power of compounding may need to come into play. As a result, the returns earned during the investment term are also able to earn profits. This enables you to build a sizeable corpus.
- Investing surplus funds is not possible
Another common misconception is that once you purchase a ULIP policy, you cannot increase your investment. However, in reality, you may easily top-up your existing ULIP premium amount in case you have an investible surplus. During the policy duration, you may top-up your investment without any limitations and as many times as you desire.
ULIPs are an excellent option that can help you invest in equities and reap the benefits of burgeoning equity markets. Recently, ULIPs have delivered excellent returns, which make these more attractive for investment purposes. Based on the type of fund you have invested in, it is possible that you may earn higher returns on your investments.
The flexibility of easily switching between equity and debt funds, and vice versa, makes a ULIP a smart investment decision. It allows you to meet your life goals while at the same time protect your loved ones in the case of an unfortunate event. If you haven’t already considered investing in a ULIP, this is the right time to do so. Browse the various options available without delay and procure one today.