Myths and rumours have been with us since civilization began. Myths can help us withstand the unknown, but at the same time, also keep us behind on the truth.
For instance, investment fallacies may prevent you from achieving your goals. Due to misinformation and ignorance, unit-linked insurance plans (ULIPs) also have many myths.
ULIPs are India’s most affordable, flexible, and tax-efficient investment plans. But one of these ULIP fallacies may have kept you from investing:
Myth 1: ULIPs are Expensive
Online ULIPs are India’s most affordable investments.
- Fund Management Charge (FMC) &
- Mortality (for the life cover amount in the policy)
IRDAI limits FMCs to 1.35% of fund value. The mortality fee is modest and disappears after a few years.
Life cover causes the mortality charge. ULIP life insurance differs between the promised sum and the available corpus. Thus, the mortality charge becomes zero when your corpus exceeds the insured sum.
ULIP mortality charges explained.
You can even get the mortality charges back at maturity. Your ULIP investment would only cost FMC.
ULIPs are economical and affordable. The Invest 4G ULIP plan requires a minimum investment of Rs. 24,000 p.a., or Rs. 2000 p.m.
Myth 2: Risky ULIPs
ULIP plans are like modern sedans that can go 50 or 150 kmph, depending on the road and your preference. Highways at 150 mph can cover long distances. You’ll drive slowly on a town road to visit your relative a few streets distant.
ULIPs offer numerous risk options:
- High-risk-high-return equity funds
- Low-risk-stable-return debt funds
- Balanced Fund to avoid extremes.
- Liquid Fund for capital preservation.
You can swap funds if you switch from high-risk to low-risk investing. Invest 4G ULIP plan lets you automate this changeover to decrease risk. Portfolio management strategies are automatic.
Myth 3: ULIPs Provide Poor Returns
Again, ULIPs resemble cars. Good highways let you drive faster and more comfortably. Regardless of your vehicle, the route will make your trip bumpy.
ULIP returns, especially for equities or balanced funds, depending on market conditions. Debt and liquid funds offer more consistent returns.
However, your risk tolerance and timeframe should guide your fund selection. Equity funds are suitable for 10-year investments. If you have less than five years, move to debt funds.
Myth 4: Low Markets Lower Life Cover
ULIP life cover is unaffected by market or fund performance. The mortality fee and policy application drive this safety of life cover.
Consider ULIP insurance with a lifetime value of Rs. 20 Lakhs. This is term insurance. If you’re close to 30, your policy’s mortality charge could be around Rs. 2000. Your money value is deducted monthly for mortality.
Check out the ULIP calculator to understand better.
ULIPs have two parts:
Life insurance premiums are independent of investment portfolio performance, so your life cover remains steady.
Myth 5: Returns Double Quickly
If this were true, most life insurance-eligible investors would battle to invest in ULIPs. ULIP returns depend on several factors:
- Market performance
- Fund investment kind
Investing frequency, especially in equities funds, may also affect it. SIP investors may have lower return volatility than lump-sum investors.
ULIP vs SIP.
ULIPs do not guarantee refunds. You can invest based on your tolerance for market volatility.
Myth 6: ULIP Does Not Offer Enough Life Cover
As an investment plan, ULIP only protects your aim financially. In 15 years, you want to save Rs. 45 lakhs for your child’s college. Building this corpus with a ULIP plan protects your child’s aim.
Your child will receive the education corpus if you die before reaching this goal. Thus, ULIP covers just particular financial goals.
Term insurance protects your family’s finances. Term insurance is cheaper and provides appropriate financial protection.
Myth 7: ULIP Cannot Be Discontinued
If necessary, you can stop investing midway. The five-year lock-in term is the alone time to keep the policy.
ULIP policies have a surrender value if you stop investing within five years. Based on premiums paid, the surrender value may be less than the invested value.
After five years, your coverage can continue uninterrupted.
Myth 8: ULIP Cannot Invest Surplus Funds
Even after paying the annual cost, ULIP plans offer top-up contributions. In ULIPs, investments over 10% of the life cover value are not tax-deductible.
Even though you can, you should refrain from investing ad hoc surplus income in ULIP policies.
Myth 9: ULIP premiums are paid for a limited time.
ULIPs allow premium payment for a limited time or the entire insurance duration. In any case, the strategy requires a five-year investment. Your policy will remain without cash value.
Unless you choose a premium payment term less than the insurance tenure, invest until you reach your goal.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.