When you are planning your finances, you aim to ensure that you secure your loved ones and also create sufficient wealth to achieve your long-term goals. There are several financial products that allow you to achieve both goals separately. However, there is a popular product amongst the population that allows you to achieve your goals while securing your loved ones. It is the Unit Linked Insurance Plan.
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What is a ULIP?
A ULIP plan that offers life insurance along with investment opportunities to the policyholder. Similar to any other life insurance, you pay premiums. However, with a ULIP, your premiums are partly used towards providing you with a life cover and partly invested in funds of your choice. It ensures that in the policyholder’s absence, their loved ones have a financial backup to rely on. On the other hand, the investment quotient allows the policyholder to fulfil their long-term financial goals.
There are several types of ULIP funds a policyholder can choose from, depending on their risk appetite. Based on your risk as a policyholder, you can choose funds ranging from debt to equity. However, unlike most investments, with ULIP you can redirect your premium if you are unhappy with your current investment. Read further to understand how premium redirection works:
What is premium redirection?
When you are investing in your ULIP, you plan your investment quotient based on your risk appetite. There are several types of funds you can choose from, and they can be broadly categorised into three types based on the risk they hold. If you have a high-risk tolerance, you can simply invest in equity-based ULIPs. They provide high returns for the high risk involved as your money is directly invested in the equity markets. If you are looking for a safe investment, there are debt funds. They provide lower returns than equity, but they also have a lower risk involved.
If you want to balance between the two, there are balanced funds. In them, your allocation is distributed partly to equity funds and partly to debt funds. Balanced funds provide moderate returns for the moderate risk involved.
However, once you have made your investment, there is a likelihood that over the years, you may be unhappy with it. Also, with your life growing, your risk tolerance may also reduce or increase. Since ULIPs are designed for the long term, you can redirect your premiums when your risk appetite changes. This means that if your ULIP funds were in the equity market and you want to switch your upcoming premiums to debt funds instead, you can simply do so. Premium redirection allows you to redirect the further premiums that you will pay for your remaining tenure to debt funds. Premium redirection ensures that if you are unhappy with your current funds, you can redirect your premium and invest in other funds that you want to. You can do the same thing if you had invested in debt funds and want to redirect your further premiums to equity.
Premium direction is a unique feature of ULIP plan since the plan allows investors to redirect where their money goes and allows them to hold their ULIPs until maturity easily. Most insurance providers allow free premium redirection at least two to three times throughout the policy duration.
After a year of paying premiums, you can redirect your ULIP premium anytime you want. You can change your fund allocation and select the new funds that you want to invest in. It is essential to note that your existing fund allocation does not change when you redirect your premium. The premiums that you pay after you have expressed that you want premium redirection will be invested in new funds of your choice.
Is premium redirection and premium switch the same?
What makes a ULIP a popular policy are features like premium redirection and premium switch. Premium redirection, as mentioned above, works simply when you are unhappy with your investment and you decide to invest in other funds instead. You state how you want your future premiums to be distributed.
A premium switch works differently. Unlike premium redirection where your past allocation remains in the same funds that you had invested in, here your entire allocation, including your past fund value, is moved to a fund of your choice. For example, if you had invested in equity, with a premium switch, your entire investment of the past in equity funds can be transferred to debt funds. The fundamental difference between both types is that premium redirection does not affect your past fund allocation, while premium switch does. A policyholder can opt for either of the features depending on how they want to allocate their funds and how they feel about their current allocation.
