How to demystify the ULIPs and their associated Myths?

Akshay was happily married for the past couple of years. This year he planned to gift an insurance plan to his wife. However, when he entered the market to shop around a decent policy he was left baffled. It was then his friend Siddharth came to his rescue and suggested him buying Unit Linked Insurance Plan (ULIP), a great way to get insurance as well as investment in a single product. However, looking at the high premium rates and volatile market related earnings, he was reluctant to buy the policy. He believed that ULIPs were costly and risky. Just like Akshay, many investors try to refrain themselves from buying ULIPs. The fear stems due to various misconceptions around the objectives, functioning and the cost structure of ULIPs. 

The article talks about some of these myths and how to demystify them:

Costly

ULIPs are costly compared to other investment products. This was bound to happen because of the high premium allocation and fund management charges that ULIPs charged in the past. However, with stringent polices ULIPs have undergone several changes, primarily with the charges and fund management fees. Costs have come down and the plans available today are competitively priced. Since ULIPs are market-linked products, policyholders are expected to stay invested for a longer term as the charges are front-loaded and benefits will  accumulate over the lifecycle of the investment. 

Only Equity Focused

People have a general phobia that market means it has to be equity. It is a gamble and if the market shoots we get high returns else we are white washed in the game. However, ULIPs allow you to choose the level of risk you wish to take, by allowing you to choose between funds with different objectives. You can choose an aggressive or a conservative fund depending on your preference. You can also switch between funds based on your lifestyle and changing risk appetite.

Extra Ordinary returns

People generally compare ULIPs with pure investment products, hence the misconception. Just as you cannot compare apples with oranges, this comparison is also not valid. You should not forget that ULIPs also provide an insurance cover along with the investment component, something that pure investment products do not offer. Hence, a part of the premium is used to provide life cover and towards management fees. The remaining amount is invested.  

Surrender issues

Some people are hesitant to buy a ULIP as they fear that they cannot surrender the policy before maturity. This is a general misconception as ULIPs come with an option to surrender the policy after the lock-in period, which is generally 3-5 years from the date of policy. You will get the fund value after deduction of surrender charges. Understand the concept that  ULIP can offer returns but you have to stay invested for long-term and only then you will be able to enjoy the fruitful returns of the policy. Premium payments can also be discontinued after the lock-in period as mentioned in the policy document.  

Decreased life cover

Again a big misconception, life cover decreases with market volatility. Some investors believe that since ULIPs are linked to equities, the sum assured would reduce if the market dips. However, this is not true. Even in case of a bear market when your fund values have hit the bottom, the life cover remains the same. In case of the death of the life assured, Best ULIP Insurance Plan pay the complete life cover or the fund value, whichever is higher.