There are various benefits that you can enjoy with wealth creation. You get to grow your wealth for fulfilling your life goals. It also helps you plan a financially secure future for yourself and your loved ones. You can also leave behind a corpus for your loved ones if something unfortunate were to happen to you. One financial instrument that has gained popularity recently when it comes to wealth creation is a ULIP.
One of the well-known types of life insurance, ULIPs provides different benefits to its investors. Coming to the features offered in ULIPs, there are two features that every investor should be aware of: premium redirection and fund switch. What are these two features? What is the difference between the two? Keep reading to know more.
What is life insurance?
Life insurance is a type of insurance wherein the insured and their dependents are protected from life risks. When you invest in any of the life insurance plans available in the market, you get into an agreement with the insurer. As per this agreement, the insurer will compensate your loved ones in the event of sudden demise due to some unfortunate circumstances. This compensation will help your loved ones in covering day-to-day expenses and plan a secure future for themselves in your absence.
What is a ULIP?
ULIP or unit-linked insurance plan is a type of life insurance plan. In a ULIP, you get the dual benefits of investment and insurance under the same plan. The premium paid towards the plan is used for both components. In the investment component, you get to invest in equity, debt, and balanced funds. Both equity and debt funds have different risk factors and different rates of return. Your requirements and risk appetite are taken into account before investment.
In the insurance component, your family and dependents are provided with a life insurance cover. Under this cover, your family will be compensated with a death benefit in the event of your untimely demise during the plan’s term. If you survive the term, you and your family get to enjoy the maturity benefits of the life insurance plan.
What is redirection of premium?
Consider this example. You invest in a ULIP, and you decide to allocate all of your premium towards equity. In the first few years, you enjoy good profits from your investment in equity funds. However, after a few years, your risk appetite reduces, and you wish to safeguard the value of your fund while at the same time wanting consistent returns. Debt funds have a lower risk factor and offer consistent returns to the investor. So, what do you do? You opt for premium redirection.
This feature allows you to redirect your future premiums into other funds. So, if after a year, you wish to invest 50% of your premium into debt funds, you can do so with this feature. Do keep in mind that this process happens before the due date of your next premium payment.
What is fund switch?
You invest in a ULIP and choose to invest 70% in equity and 30% in debt. However, after a few years, you fear the market volatility will reduce your fund value and affect your returns. So, you decide to switch your funds. What happens in a fund switch? Either you or your fund manager simply move your units from one fund type to another. For example, if you wish to have a 50-50 investment in both equity and debt compared to your current arrangement of 70-30, with the help of fund switch, that many number of units will be shifted from equity to debt. The reallocation is based on your preference.
What is the difference between the two?
In fund switch only units are moved between different funds, whereas in premium redirection, you get to choose how your future investments will be like. You can redirect your premium even after you have switched your funds. It does not impact your current investment.
Conclusion
These are the differences between these features offered in a ULIP. If you wish to do so in a life insurance plan other than ULIP, you can use the life insurance premium calculator to see how much your premium would be, based on your requirements.
