These days we surf the Internet to buy anything. All the research needed before buying a product is just a click away. The same is now true for financial products, be it insurance or investment. Comparing different products before narrowing down their choices allows investors to make an informed decision. However, this has also led to an increase in misinformation regarding popular products. One such product that has several myths associated with it is a Unit Linked Insurance Plan (ULIP).
What is ULIP?
ULIP is a unique product that offers life insurance along with an investment quotient. The premiums that you pay towards it are divided into two parts for utilization. One-half of the premium is used for providing life cover and the other half is invested in funds. The life insurance aspect ensures that in the case of an unfortunate circumstance where you lose your life during the policy, your nominee receives the sum assured. This safeguards the financial future of your family in your absence. While the investment component allows you to earn returns and create a substantial fund for your future. When your ULIP matures, you receive the fund amount along with the returns you have earned on it.
The myths associated with ULIPs vs. the truth
With life insurance and investment in one plan, ULIP safeguards your future while enabling wealth creation. Since it is a complex investment comprising two investments, individuals have several assumptions about the plan, which has led to myths forming around ULIP plans. Here are 6 common myths that are associated with ULIPs and the truth behind them:
Myth 1 – Does not offer secure coverage
ULIP comprises two components: life insurance and investment. The investment quotient of it totally depends upon the funds you have invested in and how they are performing. However, things are quite stable with the life insurance aspect. When you buy a ULIP, the sum assured mentioned is your policy that your nominee will receive in case of your sudden demise. No matter how your funds are performing, your nominee is guaranteed to receive the minimum sum assured. If your fund value has exceeded your sum assured, then the nominee receives the fund value. Insurance companies pay off their ULIP claim with the sum assured or fund value, whichever amount is higher.
Myth 2- A risky investment
One of the ULIP myths that is easily debunked is that they are a risky investment. ULIP is designed in such a manner that there are investment options available for every investor. With ULIPs, you can choose the type of investment based on your risk appetite. If you have a high-risk appetite, you can invest in equity-based funds. Whereas, if you are risk-averse, you can invest in debt funds. If you want a moderate fund, there are balanced funds available. In them, the amount is equally distributed between debt and equity funds.
Myth 3 – Withdrawals are restricted
You cannot liquidate your funds during emergencies for most long-term investments. If you want to access the funds, you either have to dissolve your investment or pay charges for withdrawals. With ULIP, things are different, even though they do have a lock-in period of 5 years. During this period, you cannot withdraw money from the ULIP. However, after the period ends, you can avail of free partial withdrawals anytime you want. This ensures that your ULIP fund is handy during emergencies.
Myth 4 – Lack of riders
It is important to remember what a UILP is and what it offers before buying it. Along with the investment, it is also a type of life insurance. When you buy a ULIP, similar to any other insurance, you get a base plan. Along with the base plan, you can choose additional riders for your ULIP by paying additional premiums. Some of the common riders that people club with their ULIP are Hospital Cash Benefit (HCB), Accidental Death Benefit (ADB), Waiver of Premium (WOP), Family Income Benefit, and Critical Illness.
Myth 5 – Heavy charges
Since ULIPs have two major components of life insurance and investment, they were expensive when they were initially launched. This is because there were several charges associated on both the fronts, making it expensive to buy. However, things have changed over the years. Insurance companies realised that people refrained from buying ULIPs because of these charges. This led them to reduce most of the charges and even eliminate some completely. Whenever any ULIP myths regarding these charges were debunked, ULIPs gained popularity amongst the masses.
Myth 6 – Fixed allocation of funds
When you buy a ULIP, you invest in funds of your choice, be it equity, debt, or balanced funds. There is a myth associated that whichever fund one has invested in, you are stuck with the same unit until your policy matures. While you can switch your fund allocation from debt to equity and vice versa anytime you want. Most companies offer two to three free switches throughout the year.