When it comes to investing in either direction in the markets or 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. Many myths surround ULIPs. Such tales can deter investors from considering ULIPs for investment. If you are thinking of investing in them, read more about the myths related to ULIPs.
What is ULIP Policy?
Based on your risk appetite and life goals, you choose to invest in either equity or debt funds. Both funds carry different risk factors and offer separate returns. A ULIP is a life insurance policy in which the policyholder can enjoy the benefits of investment and insurance under the same procedure.
Your dependents get life insurance coverage for different life risks. Once the policy matures, they will receive the maturity benefits from the procedure. If you were to pass away suddenly, your insurer would compensate your family with a death benefit.
When it comes to a financial product such as ULIPs, many myths surround it. These myths could cause an investor not to consider this product at all. Listed below are a few such myths and the facts related to them:
1. Returns are low
Fact: When you invest in ULIPs, you can invest in equity 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.
You can opt for either fund based on your risk appetite and requirement. However, you can invest both funds at the same time as well. Returns depend 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, fund management, and premium allocation are applied. However, these charges are usually deducted from the fund itself. And these charges are generally 1.35% of the fund value. Thus, charges deducted from the fund can be recovered later without losses.
3. No flexibility in premium payments
Fact: ULIPs offer different options for making your premium payments.
You can make monthly, half-yearly, and yearly premium payments. This allows you to manage your expenses without worrying about cutting down on your spending. You can also do that if you can manage to pay a one-time lump sum. 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 policy’s maturity benefits are tax-deductible under the same section.
5. Lock-in period is longer
Fact: ULIPs have a lock-in period of 5 years.
This lock-in period deters investors 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 in 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. However, if you offer your policy during the lock-in period, you will have to wait until the period ends to access your investment. Whatever returns have been gained will be paid to you.
These are just a handful of myths related to ULIPs. You can use the ULIP calculator to see which plan suits your needs.