A sound financial strategy must include the elements of both wealth creation and insurance. One such exceptional financial product that contains these elements is a ULIP scheme. A ULIP policy, which stands for Unit Linked Insurance Plan, provides you with life insurance coverage while investing your premiums in market-linked assets of your choice.
Investors have several types of ULIP fund alternatives from which to select. Unfortunately, despite seeing a rise in popularity in recent years, many people often fall prey to several myths about these plans. Here’s busting the most common myths that are associated with ULIPs.
Biggest myths about ULIPs
Myth #1- A ULIP investment is risky
Most people think a ULIP policy is risky because the return on investment depends on market performance. However, it is only part of the picture.
When you invest in a ULIP, your life cover amount is not affected by your investment in funds and any market developments. However, the return on the premium you invest in a fund is related to market movements.
But this risk can be dealt with through the fund choices you make. ULIPs give you a diverse pool of funds to choose from, which can be categorized as either equity, debt, liquid, or hybrid funds. Out of these, equity funds have the highest element of risk and the highest potential returns. On the other hand, debt and liquid funds are the most secure but give lower returns. So you can make a choice based on your risk tolerance and the prevailing market conditions.
You can invest for the long haul to ride out temporary market fluctuations. At the same time, you can periodically switch between funds to maximize your returns in bull markets or safeguard your investment value in bearish scenarios.
Myth #2- A ULIP is expensive
Another misconception about ULIPs is that they are costly because they contain various operational costs.
Yes, there are indeed operational costs for these plans, but that is because they are more complex investments where numerous experts work together for your benefit.
Apart from that, the return you will get after the completion period covers all operational costs. So even when you pay these costs, the returns you get eventually will more than make up for the same. Moreover, most of these charges have a cap on them set by IRDA (Insurance Regulatory and Development Authority). This ensures that, in the long run, the impact of these charges on your fund is minimal.
Myth #3- A ULIP has low returns
It is generally believed that a ULIP is not suitable as an investment option because it has a low return on investment, which is not valid.
First, let’s see why people think like this. Generally, a ULIP policy has a lock-in period of 5 years. But most people believe that it will be good to exit after the lock-in period, which is why they do not get their desired investment returns.
Instead of exiting in haste, people must invest in their ULIPs regularly and keep checking their portfolios. Long-term investments always yield higher and safer returns for investors.
Myth #4- A ULIP exit is difficult
What makes people think that an exit is difficult from ULIPs? The five-year lock-in period, of course! People generally believe that if they invest in this plan, their money stays fully locked for this period, and if the market sinks, then their money goes down the drain.
However, it is not the case. The lock-in period is only for the convenience of the insured, and it doesn’t mean that you cannot discontinue your ULIP after this duration. Furthermore, the procedure for discontinuation is simple after this lock-in period, and most often, it does not come with any extra charges.
Myth #5- You choose your funds only once, and surplus investments are not possible
Most people think that they have to choose their fund investment options at the beginning only, and after that, they cannot switch or revise it.
Nothing could be more misleading. Even after starting a premium payment, you can switch between an equity fund, a debt fund, or a mixture of both. Also, if you have surplus funds, you can invest them as top-up premiums.
In this way, you will get a high return on your investment, manage to invest your surplus fund at a single destination, and can also avail of tax benefits.
These are some of the common myths that people have about ULIPs. But, as you can see, with proper strategy and patience, you can considerably mitigate market risks while also enjoying long-term investment returns.