Unit Linked Insurance Plan (ULIP), being a robust insurance-cum-investment plan, has many misconceptions and myths surrounding it. Due to flawed image creation and rumours, it has been difficult for ULIP to obtain acceptance even after the product scheme was revised. Many policyholders have either purchased a wrong plan or have quickly surrendered the plan leading to loss of money. In today’s article, we shall reveal some reality checkpoints around the most common misconceptions about ULIP policy.
5 Most Common Misconceptions About ULIPs
Myth 1: ULIPs are Not a Good Investment Option
ULIP is an insurance product which offers life insurance and an opportunity to invest and build wealth. In reality, ULIPs offer abundant opportunities to invest. It gives you the power to invest based on your risk appetite. You can invest in large-cap, mid-cap or small-cap funds. You can also invest in a combination of such investment opportunities.
Furthermore, ULIPs are flexible and customisable. It offers you the flexibility to change premium payment terms and sum assured and allows you to customise the policy with the help of riders. However, ULIPs are not made for short-term investment plans and should be opted by someone interested in 10 years or more of financial investment with huge returns.
Myth 2: ULIPs have a 3-year Lock-in Period
Post-2010, according to the revised regulations of the IRDA (Insurance Regulatory and Development Authority), the lock-in period for ULIP has been updated from 3 years to 5 years. As per the new regulations, the revised period will help individuals who are looking for a high sum assured and lesser initial charges to find promising high returns because of investment in ULIP funds.
Myth 3: There are Multiple ULIP Charges
The revised policy as per the IRDA guidelines, policyholders can reap benefits of investment in a much better manner. Previously, almost 60-75% of the first year premium dedicated to charges in some cases. However, the recent changes have made sure that these charges are uniformly distributed over the lock-in period of 5 years.
Moreover, a respectable portion of the premium is invested right since the first year of your policy. Also, the charges and fees set by IRDA are the maximum an insurance company can charge, hence you must analyse and compare plans accurately to get the best ULIP policy.
Myth 4: ULIPs are Expensive and Non-Liquid Investment Instrument
As stated above, ULIP charges are evenly distributed over the lock-in period of 5 years. Hence, ULIPs should not be considered expensive anymore. Rather, one must see it as a long-term investment with multiple options to invest. ULIPs offers you flexibility, which means if you think your funds are underperforming, you can switch and invest where you expect higher returns.
Also, in case of emergency, ULIPs offer partial withdrawal after completion of the lock-in period without any extra cost. Post-withdrawal, remaining units continue to stay invested, resolving the concern of liquidity.
Myth 5: ULIPs have High Switching Charges
ULIPs do not have high switching charges. On the contrary, some insurance companies do not charge switching at all. They offer you a good number of 24 switches in a year which is more than sufficient for any policyholder. You can always check for the number of available free switches when you are comparing ULIPs among multiple insurance companies.
Going by definition, even though ULIPs co-relate more with insurance than an investment plan, the governing regulations have paved the way for a product that provides policyholders with systematic capital appreciation over the long term. Ease of premium payment, low cost, tax benefits and ability to switch from one fund to another free of cost has made ULIP an important investment vehicle to fetch high returns.