5 Myths about Investing in ULIPs and their reality in 2022

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Introduction

For the past several years, the Insurance Regulatory and Development Authority of India (IRDAI) and all the insurance providers in India have taken several measures to increase awareness about life insurance and the many insurance products available in the market.

But the outbreak of the pandemic in 2020 proved to be the catalyst nobody expected. On account of the uncertainty prevailing over the past two years, an increasing number of people have turned to life insurance for some degree of essential financial stability.

In fact, life insurance penetration in India rose from 2.82% in 2019 to 3.2% in 2020. This is quite close to the global average of 3.3%.[1]

However, despite this positive development, there are myths and misconceptions around life insurance in general, and ULIPs in particular. To debunk the prevailing myths about ULIPs, let’s begin at the basics.

What is a ULIP?

A ULIP or a Unit Linked Insurance Plan is a kind of life insurance cover that offers two benefits in one policy, namely insurance and investments. When you purchase a ULIP plan, you get the advantage of market-linked investments too. You get to choose from a variety of ULIP funds such as debt funds, equity funds, hybrid funds and more.

You can select the funds that match your financial goals and your risk profile. With time, the investments you make may appreciate in value based on the market movements, helping you create wealth over the policy term.

In addition to the advantage of wealth creation, you also get the benefit of a life cover. So, in case something untoward happens to you over the course of the policy term, your insurance provider will pay out the death benefits due under the plan to your nominee.

This sums up the basic working of a Unit Linked Insurance Plan.

Common myths about ULIPs debunked

The Unit Trust of India introduced the first ULIP in the country way back in 1971. In the 50 years since, Unit Linked Insurance Plans have evolved a great deal, with many new features and benefits now on offer.

To truly make the best use of a ULIP plan, you need to know exactly what it offers. Unfortunately, there are many myths surrounding ULIPs that prevent people from making the most of this kind of life cover.

So, let's debunk some of the most common misconceptions about Unit Linked Insurance Plans.

Myth #1: ULIPs carry a very high level of risk

Because ULIPs include equity funds, which involve equity market-linked investments, they are often given a bad rap as high-risk products. But merely having an equity component does not make a product risky. In fact, Unit Linked Insurance Plans can be tailored to suit the needs of every kind of investor, across varying risk profiles.

The truth behind the myth:

ULIPs allow you to invest in a wide range of funds, including equity funds, debt funds, and hybrid funds, among others. So, a ULIP is only as risky as you make it. If you are a young investor who is keen on creating wealth over the long term, you can start off by investing in equity ULIP funds.

Over time, as you approach the age of retirement, your risk appetite will undoubtedly go down. You can then switch to debt funds, making your ULIPs less risky.

Alternatively, if you are an inherently conservative investor, you can even choose debt ULIP funds right from the start. It all depends on your preferences and choices.

Myth #2: The life cover in a ULIP depends upon the performance of the market

Since ULIPs are promoted as market-linked investments - which they are - it is a common misconception that the life cover in a ULIP depends on how the market performs. The truth, however, is that there are two components in a Unit Linked Insurance Plan, namely -

  • The insurance component
  • The investment component

The investment component depends on how the market-linked assets perform. But the insurance component - or the life cover - is independent of the market movements.

The truth behind the myth:

The sum assured under a Unit Linked Insurance Plan makes up the insurance component. It is the minimum sum that your nominee will receive, in case of your unfortunate demise during the policy term.

So, in case the insured incident occurs, your nominee will generally receive the higher of the sum assured or the fund value. This means that even if the market tanks, your nominee will receive the sum assured under the plan. The cover does not reduce depending on the market’s performance.

Myth #3: ULIPs offer low returns

This is one of the easiest myths to bust about Unit Linked Insurance Plans. ULIPs, being market-linked products, do not offer low returns. In fact, ULIPs are among the prime wealth creation tools for any investor planning to build a sizable corpus over the long term.

There are equity funds that carry a higher level of risk, but simultaneously, they also come with the potential to generate significantly high returns, based on the market movements. Debt funds may offer lower returns than equity funds, but it is entirely up to you if you wish to invest in them.

The truth behind the myth:

Depending on the fund you choose to invest in, you could earn significant returns over the course of your policy term. Check out the CAGR that some of the top funds in Unit Linked Insurance Plans from ABSLI have delivered since their inception.[2]

ULIP Fund Name CAGR since inception
Pure Equity Fund 16.55%
Magnifier Fund 13.01%
Maximiser Guaranteed Fund 12.91%
Multiplier Fund 12.57%
Capped Nifty Index Fund 12.48%
Creator Fund 11.86%
Asset Allocation Fund 11.31%
Pension Enrich Fund 11.23%

Myth #4: ULIPs do not offer accidental cover

No matter how careful you may be, there are certain things that are simply beyond your control. Accidents happen all the time. And occasionally, they may be fatal. In case an accident causes a person’s demise, their family members - particularly the dependent ones - may find themselves without a financial safety net.

Life insurance plans can be of great help during such times, because they also cover accidental death during the policy term. One of the many myths surrounding ULIPs is that they do not offer any accidental cover.

The truth behind the myth:

The truth is that ULIPs, like all life insurance plans, cover deaths due to accidents. In addition to this, you can also enhance the benefits offered by your basic Unit Linked Insurance Plan with add-on covers.

One such cover is the accidental death benefit rider, which offers financial payouts in case of the policyholder’s demise on account of an accident. These payouts are over and above the benefits offered by the life cover.

Myth #5: ULIPs cannot be surrendered before maturity

Occasionally, policyholders may feel the necessity to surrender their ULIPs for different reasons. Some people may be in need of liquid funds, others may be unsatisfied with the returns from their plan, and yet others may be unable to afford the premiums due to their circumstances.

Policyholders who may not be aware of how a ULIP works may be led away by the myth that ULIPs cannot be surrendered before maturity.

The truth behind the myth:

The fact is that ULIPs have a lock-in period of five years. After this period is complete, you can freely surrender your ULIP plan if you need to. Upon doing this, you will receive the surrender value for your policy.

In case you surrender your policy before the lock-in period is complete, you will receive the amount due only after the 5-year tenure is up. But the long and short of it is that ULIPs can be surrendered.

Conclusion

This brings our discussion on ULIP myths to a close. How many of these myths were you aware of? And how many did you learn the truth about today? Whatever your answer may be, there’s no denying that perhaps now, you understand Unit Linked Insurance Plans a lot better. And you can make use of these insights to plan your ULIP purchase and make the most of the benefits offered by your policy.

Read next: HOW INSURANCE CAN HELP YOU GROW MONEY

Debunking the common myths around a Unit Linked Insurance Plan can undoubtedly help you understand these policies better. But if you are still curious about how insurance can help you grow money and create wealth over the long term, we have a blog that can give you all the details.

Read it here

LOOKING FOR ADDITIONAL COVER BEYOND YOUR ULIP? A TERM PLAN MAY BE JUST WHAT YOU NEED.

If you are looking for a cost-effective way to meet your needs for additional life insurance coverage, the ABSLI DigiShield Plan fits the bill perfectly. This term insurance plan offers sizable coverage at extremely affordable premiums.

But that's not all. You also get to choose from 10 different plan options, including an increasing cover option, a whole life cover option, the Return of Premium (ROP) option, income benefit and more.

The plan also comes with a wide range of riders to choose from too, so you can enhance the benefits offered by your cover.

Know More

[1] https://economictimes.indiatimes.com/wealth/personal-finance-news/covid-brings-life-insurance-penetration-in-india-to-global-levels/articleshow/89243583.cms
[2] https://lifeinsurance.adityabirlacapital.com/about-us/know-our-funds?fund=RHd85jPY7lEO2X60x2N6XVMu8fL1d6wX9d7vIuneo6fgEgUcyUvzDsRrdfnMMRRo
ADV/4/22-23/146

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