Unit Linked Insurance Plan (ULIP) is an insurance plan that offers the best of a life cover and an investment instrument. The premium of ULIP goes toward life insurance and investment fund options such as debt, equity, or both. While ULIPs have become a popular choice of investment in recent years, many people still don’t know its features and benefits, which deters them from parking money on the same.
Besides these, several myths about ULIPs further confuse individuals and prevent them from making the most of the investment option. On that note, let us check out the common myths and key features of ULIPs to improve your experience of investing in them hassle-free.
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Debunking the Common ULIP Myths
Below are some common myths regarding ULIPs:
Myth 1: ULIPs are expensive
Fact: Individuals have the leeway to choose the amount of money they want to park in their Unit Linked Insurance Plan. This helps them choose the ULIP premium as per their needs and financial standing. Additionally, they have the option to start their investment with a small amount and gradually increase the same over the plan’s tenure. Even the charges that accompany ULIPs are minimal, making it easier on one’s pocket.
Myth 2: ULIPs are risky
Fact: First thing first, the risk in Unit Linked Insurance Plans depends on the type of fund you choose. For instance, equity funds are known to provide high returns, however, they also accompany high risks. Then again, you can choose to invest in funds with a low-risk quotient, like a balanced fund or a debt fund. This allows one to invest in ULIP plans as per their risk appetite and spread the risk accordingly.
Myth 3: ULIPs are not flexible
Fact: Contrary to the common myth, ULIPs are offers flexibility in more than one way. To begin with, individuals are allowed to choose the premium amount. They can also choose the payment term and the frequency at which they wish to pay the premium toward the plan, i,e., yearly, half-yearly, and monthly. Above all, it allows one to choose the funds they want to park their money into for their chosen term.
Now that you know the common myths and the actual truth behind them, let’s check out the best way to pick a ULIP that matches your needs.
Things to Keep in Mind When Looking for a ULIP
Unit Linked Insurance Plans are a combination of investment tools and life insurance coverage. This is why, it is crucial to keep the following in mind to opt for a ULIP –
- Know the features
ULIPs accompany several features and benefits and to make the most of them it is important to know them. For instance, ULIP offers these features to the policyholders –
- A life cover
- The option to switch funds
- An avenue to invest surplus funds during insurance tenure
- An option to access funds through partial withdrawal
That said, different ULIPs may come with other features and benefits that set them apart. This is why it is important to check the features and evaluate the same to determine if the same aligns with their goals.
- Evaluate your financial goals
Evaluating your financial goals for the long term helps ascertain how much investment you would need to start with to reach there. Your financial goal can be anything from purchasing a car or a house, starting a business, or saving for your child’s higher education. Note your goals and the time you would think would be enough to achieve them. Then park your money into suitable savings and income plans accordingly.
- Find out the ULIP charges
Several charges are levied on ULIPs and they then depend on the choice of fund selection. It is important to understand the different charges accompanying the policy to determine whether the plan suits financial standing or not.
- Know the tax benefits
Did you know that policy premiums paid are eligible for tax deductions? Individuals are entitled to claim up to Rs. 1.5 lakh a year under Section 80C of the Income Tax Act, 1961. Before getting a ULIP make sure to check the tax deductions you are eligible for to save more on your investment.
- Know your risk appetite
Being aware of one’s risk appetite comes in handy to ascertain which investment options are best suited for them. Typically, those with a high-risk appetite opt for equity fund ULIPs whereas, the ones who have a low-risk tolerance are more comfortable with debt-fund linked policies.
What are the Charges Linked with ULIPs?
There are several charges associated with a Unit Linked Insurance Plan and you must know all of them.
- Premium allocation charges
These charges are made out to the expenses incurred by the policy provider in underwriting and selling the product. Premium allocation charges are linked to ULIP premium payments and are deducted upfront. Notably, an upfront deduction means that before Unit Linked Insurance Plan investment is bifurcated toward investment and insurance cover – a portion of the investment is deducted as ULIP’s premium allocation charges.
- Fund management charges
These are deducted by the insurance provider for managing investment funds in their ULIP plans. The fund management charges are capped at 1.35% and are deducted before the insurance providers arrive at the fund’s net asset value.
- Mortality charges
These charges accompany the insurance portion of the ULIP. Typically, these charges are computed on the basis of the insured’s health condition, age, premium amount, and policy duration. The insurance provider assumes the policyholder will survive till a given age before they actually pay out for the insurance policy. So, these charges compensate the insurer in case the insured doesn’t survive till the assumed age.
- Policy administration charges
These charges account for the administrative work done by the policy provider toward maintaining the ULIP account.
- Switching charges
You need to pay these charges when you want to switch from one fund to another in your ULIP investment portfolio.
- Surrender charges
These charges accompany premature withdrawals from the ULIPs. Notably, the charges depend on when the funds are withdrawn, i.e., before or after the lock-in period.
Keep these in mind when scouting the best ULIPs and plan your investments better. Notably, it is also important to look for a trusted insurance company to ensure you avail of quality service and assistance with regard to ULIP.