Buying an insurance policy can often get tricky, because of the plethora of available alternatives. Depending on your requirements, several options are available in the market. However, the right plan is the one that checks all the boxes at once. For instance, if insurance coverage along with investment is your objective, a Unit Linked Insurance Policy or ULIP is a smart alternative.
A ULIP offers insurance and investment in one single policy, and thus, is also known as an insurance-cum-investment plan. Using a ULIP cover, you can not only seek financial protection for your family, but also meet your investment goals.
When it comes to selecting a ULIP, there are a myriad of plans that are available. Based on your need for life insurance coverage and the investment options offered, you can choose a policy that fits right. However, there is some mis-selling that you need to be aware of. Some insurance agents and intermediaries like corporate agents and banks may lure you into investing in a policy that may not actually be right. Being aware of it will help you make an informed investment decision. Here are five common sales pitches to avoid.
- Switching to a new plan
Some mis-selling may happen when you are informed that the ULIP has reached its highest Net Asset Value or NAV and there is not much change or further growth. So, it shall be best to switch to a new ULIP.
In reality, there are no provisions that allow policyholders to switch from one ULIP to another ULIP. Uninformed and gullible buyers may take such advice seriously and end up buying a new plan. This way, two policies will be active in your name, and you would be required to pay hefty premiums for both when you are not ready for such a financial commitment. ULIP regulations only allow switching between different funds within the same ULIP. Thus, buying a new plan would mean having two ULIP policies for you.
Further, the saturation of NAV is a myth, as the valuation of the ULIP fund is based on market-linked investments. As the financial market continues to go through troughs and peaks, the investments also fluctuate and are never saturated.
- A ULIP is similar to a bank FD
Sometimes, ULIPs are compared to a bank Fixed Deposit (FD), especially to those individuals that prefer FD over other forms of investment. Here, they compare the returns from both these products and naturally, ULIPs indicate higher returns than an FD. However, one critical point that isn’t stressed enough is the risk involved.
ULIPs are invested in market-linked securities, where the fluctuations in returns are directly based on how financial markets perform. On the other hand, bank FDs offer guaranteed returns along with protection against bank fraud. ULIPs are more of an equity-linked product aimed at wealth creation, whereas bank FDs are designed with capital preservation in mind as the primary objective.
- ULIP is a five-year tax-saving product
‘You only need to invest for five years’ is a common mis-selling technique used when pitching ULIPs to bait uninformed buyers. Individuals seeking to save tax for a short period might fall prey to this.
ULIPs have a mandatory lock-in period of five years after which they can be switched or even partially withdrawn. However, the actual policy tenure is longer and ULIPs are regarded as a long-term investment product. The longer tenure of the policy helps average any fluctuations that the financial market involves. While they involve tax benefits by way of deduction up to ₹1.5 lakhs under section 80C of the Income Tax Act for the premium paid, it must not be considered a short-range tax-saving product. It is a protection cum investment policy that is best suited for long-range investments.
- Double your investment in ULIPs
ULIPs are sometimes mis-sold as investments that get your money doubled within five years. It is used especially when the financial markets are at an all-time high. The historical returns are used as bait to lure in new buyers.
The reality of the situation is that there is no guarantee that your investment will double within the said period. It depends on the type of investments that a policyholder opts for. For instance, investments in equity funds that offer high returns may increase the fund value substantially, but also come with a high risk. On the other hand, debt funds are safer investments but may not be able to double your investment. So, depending on the type of fund and its performance, your investment may or may not double.
- One-time premium payment
‘Pay once and enjoy all the benefits’ is another common sales pitch used to market ULIPs. But in reality, not everyone would choose to buy a policy that requires a one-time payment. Many policyholders may be sold a plan with a regular payment option. This requires the policyholders to keep paying the same premium amount each period for which they might not be ready.
While these mis-selling techniques may be used, you must be informed to avoid falling prey to them. Using a ULIP calculator, which is a free tool available online, you can select a suitable ULIP cover that is right for you based on the premium payment and corpus accumulation. This ULIP calculator also comes in handy for comparing several ULIPs among each other with the aim to choose the right one based on your requirements.
