When it comes to investing in either directly in the markets or in any financial instruments, there are many things that you’ll come to hear about them. Often, they turn out to be wrong information being advertised to confuse potential investors.
This can also happen with a ULIP. There are many myths that surround ULIPs. Such myths can deter investors from considering ULIPs for investment. If you are considering about investing in them, read on to know more about the myths related to ULIPs.
A ULIP is a life insurance policy, in which the policyholder can enjoy the benefits of investment and insurance under the same policy. Based on what your risk appetite is and what your life goals are, you choose to invest in either equity funds or debts funds. Both funds carry different risk factors and offer different returns.
Your dependents get life insurance cover from different life risks. If you were to pass away suddenly, your insurer will compensate your family with a death benefit. Once the policy matures, they would receive the maturity benefits from the policy.
When it comes to a financial product such as ULIPs, there are many myths that surround it. These myths could cause an investor to not consider this product at all. Listed below are few such myths and the facts related to them:
1. Returns are low
Fact: When you invest in ULIPs, you have the option of invest in equity funds and debt funds. In equity funds, money is invested in stocks of market-listed companies. This fund carries a high-risk factor and offers higher returns. In debt funds, money is invested in govt. securities and bonds, cash markets, and other forms of liquid markets. This fund carries a low-to-medium risk factor and offers medium returns.
Based on your risk appetite and your requirement, you can opt for either fund. However, you can invest both funds at the same time as well. Returns are dependent on how you manage your investment and switch from one fund to another at the right time. This keeps the returns consistent.
2. It is expensive
Fact: Like every other financial product, charges are present in ULIPs as well.
Charges such as policy administration charge, fund management charge and premium allocation charge are applied. However, these charges are usually deducted from the fund itself. And these charges are usually 1.35% of the fund value. Thus, charges deducted from the fund can be recovered later without any losses.
3. No flexibility in premium payments
Fact: In ULIPs, there are different options of making your premium payments.
You can make monthly, half-yearly and yearly premium payments. This allows you to manage your personal expenses without having to worry about cutting down on your spending. If you can manage pay a one-time lump-sum amount, you can do that as well. These options are available to every policyholder.
4. Lack of tax benefits
Fact: In ULIPs, you get tax benefits on premiums, maturity benefits and withdrawals.
Premium payments of up to Rs. 1.5 Lakhs are tax-deductible under Section 80C of the Income Tax Act. If any partial withdrawals are made from the policy, they are also eligible for tax-deductions under Section 10(10D) of the Income Tax Act. Similarly, the maturity benefits from the policy are also tax-deductible under the same section.
5. Lock-in period is longer
Fact: ULIPs have a lock-in period of 5 years.
The reason for the existence of this lock-in period is for deterring the investor from surrendering their policy immediately after purchasing it. As the policy starts giving better yields after the end of the lock-in period, it would be wise to stay with the policy till its maturity to enjoy its full benefits.
6. Life cover reduces with time
Fact: As the life cover aspect is not connected to the investment part in any way whatsoever, there is no reduction in life cover at any point of time.
The life cover begins immediately after you have purchased the policy.
7. Policy cannot be surrendered
Fact: As mentioned earlier, ULIPs have a lock-in period of 5 years. If you wish to surrender your policy, you can easily do so after the period end. Whatever returns have been gained will be paid do you. However, if you surrender your policy during the lock-in period, you will have to wait till the period ends in order to access your investment.
These are just a handful of myths related to ULIPs. You can use the ULIP calculator to see which plan is suitable as per your needs.