Unravelling the Common Myths About ULIPs
When it comes to investing in an insurance policy, people have several misconceptions about it. Read on to know some of the most common myths about ULIPs and the reality of it.
Initially, the life insurance policy was considered to be a rigid investment tool because the value of the returns earned got lost due to the rising inflation. However, the advent of ULIP (Unit Linked Insurance Plan), provided the perfect answer to investors’ wealth creation and protection needs. While ULIP is one of the most sought-after insurance plans in India, several people believe in the various myths around it. Let us look at some of the common myths around ULIP and the reality behind it.
Myth – ULIPs are costly
When the ULIPs were first introduced in the market, it was positioned in a way that it was more suitable to the insurance companies and distributors than the investors. Before the IRDAI (Insurance Regulatory and Development Authority of India) introduced amendments in 2010, a large portion of the premium paid went towards the administration, fund management and allocation of premiums.
However, post-2010, IRDAI implemented strict regulations that capped the costs charged by the insurance companies. Today, insurers charge as low as 1.5% to 2% for administration as compared to 6% to 10% before 2010. Additionally, with almost all the insurance companies allowing customers to buy ULIPs online, the intermediary charges are eliminated making ULIP an excellent low-cost investment product that offers valuable returns.
Myth – ULIPs are highly risky as they invest in equities
ULIPs allow you to invest in a wide array of investment products based on your risk appetite and investment goals. You can either take risk and choose to invest in equities for higher returns or you can invest in conventional funds and get lower but assured returns. Young investors in their 20s who have fewer financial obligations can take a higher risk as compared to an investor who is nearing the retirement age. Thus, ULIPs cater to all sets of investors based on their personal needs.
Myth – The returns are not significant
Most people compare ULIP plan to pure investment product, and therefore, they do not realise that their comparison is not valid. You must know that ULIPs also provide you with the benefit of protection, which no pure investment products offer. So, considering this fact, you must realise that the returns provided by ULIPs are quite competitive and at par with many conventional investments. Experts suggest that if you stay invested for a long period, ULIPs offers significant returns.
Myth – ULIPs life cover is affected by market volatility
Since the ULIPs are linked to the equity market, some people believe the sum assured of the life cover decreases when the market plunges. The reality is irrespective of the prevailing market condition, and the fund value, the value of the life cover remains the same. In the event of the untimely demise of the policyholder, ULIPs re-compensate the full life cover or the value of the fund, whichever is higher.
Myth – Premiums are to be paid only for a limited period
The premium payments of ULIPs depend on the plan you choose. Though some plans allow limited premiums, it is not applicable to all plans. You must pay the premium as per the plan, and if you fail to pay the premium, the policy may continue, but the charges will be deducted from the fund value. This will reduce your returns. Hence, you should pay the premium promptly.
If you wish to invest in ULIP, you must objectively compare it with other investment products and consider important factors like maturity bonus, surrender value of the policy and the level of cover you need. It is after all an insurance plan that not only protects your family but also help you grow your money in the long run.