5 Myths About ULIP You Must Know Before Investing
If you can’t decide where to put your money and you’re confused between an insurance policy and an investment, then you don’t have to look beyond a ULIP plan. We understand that it can get quite challenging to decide which one your portfolio needs more. Insurance gives you stability. However, investments grow your money. Which one do we choose?
We recommend investing in a ULIP policy. It is a blend of insurance and investment and has the best of both worlds.
What Is a ULIP Scheme?
To begin with, a ULIP investment allows insurance companies to pool in all the money generated from their insured parties and invest it in asset classes such as debt and equity as per customer’s choice. In layman’s terms, a ULIP policy is an instrument that lets you buy insurance and investments simultaneously. With this product, you get the benefits of equity market returns and the stability of debt funds largely in the proportion invested in these two asset classes.
A classic example of a ULIP plan is child insurance. The premium that you pay towards the ULIP scheme is usually divided between debt and equity. Also, depending upon the set of funds that is chosen, part of it will be allocated to equity, which means that you can possibly look at growing your portfolio over time.
Another perk is that the presence of debt funds will also ensure that you get a certain promised amount at the end of your policy. Debt funds help you reduce volatility while equities generate profits in the long term.
We understand there are various ways to invest. You could go for a SIP in equity mutual funds if you wanted the benefits of equities. You could alternatively go for a Fixed Deposit with a bank if you wanted debt funds. However, if you wanted both, ULIP could help.
The working of ULIP seems pretty simple on paper, and clearly, ULIP investments look as though they are a win-win situation! However, you will be surprised to know that certain myths are doing the rounds, which likely prevent a policy buyer from considering ULIP investments.
Here are five of the most common myths:
1. High Risk
Policyholder may choose asset allocation between equity and debt depending upon their risk appetite. Component of debt in asset allocation will help reduce risk and volatility.
Moreover, there is a certain fixed amount, your sum assured, which you will get anyway, upon your plan’s maturity. You could even opt for a monthly income plan or a monthly saving plan, wherein the insurance provider will have to deposit a fixed sum in your account every month. There is also a concept of dynamic asset allocation whereby depending on the market tides and the movement of prices, your funds will automatically be shifted from equity to debt if the risk seems too great. So, be rest assured that the asset allocation in ULIP can be aligned to the risk appetite of the individual.
2. Low Returns
Now, there is a common investor sentiment that whatever has the word ‘debt’ in it must come with meagre returns. But, since there is an allocation to equities involved in the picture, you may get reasonable long-term returns.
If you are an aggressive investor, you could always opt for funds high on equity and low on debt. Also, the fact that you get the freedom to choose your funds puts you in control of the asset allocation. Just with a bit of consultation with your insurance provider, you can pick the right ULIP policy.
A standard time to measure your ULIP investment is five years. Give your investment a minimum of 5 years, and you’ll see that it’s capable of delivering good returns too. However, as is with any other form of investment, patience and monitoring are of prime importance!
3. No Liquidity
In ULIP investments, there is always an option of partial withdrawals and monthly saving plans. As per monthly income plans, you will get a pre-decided amount every month, which is usually enough to supplement your income and provide you with the required liquidity. So, this rumor couldn’t be farther from the truth.
While there is a lock-in period with most insurance investment-related matters, you still have an option to withdraw during that span at the cost of an exit load. Post your lock-in period, which can be 3 to 5 years after a ULIP policy is over. You can withdraw and even set up periodic transfers at no additional fees.
4. No Sum “Assured”
This is a big one and a fairly common one at that! You’ll often hear people say things like, “In a ULIP plan, the sum assured varies as per the position of the equities in your scheme.”
While it is true that your portfolio depends on that, most insurers provide a fixed sum, which is pre-discussed before you even sign the papers and pay your first premium. This is your sum assured, and in the case of ULIP plans, regardless of the volatility in the share market, you get that fixed sum.
If you opt for a ULIP policy as your life insurance, your life cover is paid in full, which can either be the current value of your funds or the pre-decided cover. Always remember you will be paid the higher amount of the two. So, it is more than assured and safe!
5. No insurance benefits.
Just because a ULIP scheme lets you put your money in equities does not mean that it won’t function as a good insurance policy. It will! You get benefits akin to that of endowment policies or whole life insurance policies. Moreover, if you feel, upon reading your papers, specific points have been missed, you could always pay for top-up riders and derive more benefits.
We recommend choosing a trusted life insurance provider like Tata AIA life insurance to kick start your ULIP portfolio.
Now that all these baseless and misguiding rumors have been busted, we hope you feel more confident investing in a ULIP policy.