Life Insurance was thought of as a boring and rigid avenue of investment where returns lost their real worth due to inflationary trends. This was until Unit Linked Insurance Plans (ULIPs) were introduced in the market which provided the answer to the investor’s wealth creation need along with insurance protection. Soon after its launch, ULIP plan registered good sales and other forms of insurance plans were given a miss. However, the high allocation charges inherent in the product made customers lose interest until 2008 when IRDA slapped on the mandatory limits on the allocation and other charges charged by the ULIPs. Since then ULIPs have come a long way and the new plans with very attractive charge and benefit structure are being launched. Despite their image makeover, there are certain myths still attached with ULIPs which prevent individuals to invest in them.
The purpose of this article is to bust such common myths which are attached with ULIPs and present these life insurance plans in their true form.
Myth 1 – ULIPs are costly in terms of their charge structure
I don’t blame you if you are afflicted with this myth. Prior to 2008 ULIPs did have a heavy charge structure in the form of premium allocation charges. These charges sometimes went as high as 80% of the first year premium and the customer’s effective investment got eroded. However, IRDA intervened and now the ULIP charge structure has come down drastically and is in single digits. In fact, some of the newly developed plans are proving cheaper than direct mutual fund schemes as companies are giving the allocation charges a miss. So, if you were abstaining from investing in ULIPs only because of the high charges, you have nothing to worry about now.
Myth 2 – The returns are volatile in ULIPs
As ULIPs invest the customer’s premiums in capital markets, the factor of volatility does enter the picture. However, there are different funds available for selection based on different risk profiles. There are equity funds which are risky, debt funds which are not and balanced funds which combine the risk and returns of equity and debt funds. So, if you think that ULIPs are risky, you are mistaken. The option of Debt funds is available and can be chosen if you are risk-averse.
Myth 3 – The returns are doubled in a very short-term
Yes, I heard this mantra from many agents who boasted that ULIPs can double the money invested after only 3 or 5 years. This resulted in a lot of miss-selling and those of you who are seeking mystical returns from ULIPs should know the complete picture. The equity funds in the ULIPs promise the highest returns and then to the returns are marked-dependent. You cannot expect your investments to double if the market is in a bad shape. Moreover, the concept of short-term is another major myth. Nothing yields good returns in short tenures. For your investments to grow, you should hold your investments in equity funds for at least 10 to 15 years and then expect double or close to double returns
Myth 4 – The premiums are to be paid only for a limited tenure
Premium payment under the ULIP plan depends upon the plan features. Though some plans do offer limited premium payment tenures, all plans don’t. You are supposed to pay the premiums till the tenure mentioned in your plan though surrendering is allowed but only after completion of 5 years. If the due premiums are not paid, your policy would continueand the applicable charges would be adjusted from your fund value. This would hamper your returns and thus paying the premiums due would be a better option.*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Myth 5 – The life cover is very little
Contrary to popular belief, ULIPs do provide a decent coverage which depends on the amount of annual premium you pay. Some plans provide 40 times the annual premium paid as coverage and so the coverage is not limited. Moreover, irrespective of your fund growth, the coverage provided under your plan would be secured from market volatility as the benefit is always the higher of the fund value or the fixed Sum Assured.
People develop pre-conceived notions with all products and a ULIP is no exception. You might believe in these popular ULIP myths but I hope my endeavor to demystify these myths would prove helpful in breaking your notions and motivating you to invest in a good ULIP.