There are several financial instruments available these days for efficient financial planning. With the plethora of options, it can be confusing to decide which instruments you should add to your portfolio. One such instrument that has gained popularity amongst people is a ULIP (Unit Linked Insurance Plan).
ULIP is a combination of insurance and investment. In it, a part of your premium is used for providing comprehensive life insurance while the other part of the premium is invested in the funds of your choice. You can choose between different funds based on your risk tolerance, financial aim, and long-term goals. In the broader category, three investments you can choose from are equity or balanced funds. People who have a high-risk appetite usually invest in equity funds. While those who want to play it safely put their money in debt funds. There are balanced funds that offer a combination of equity and debt funds. It is important that you measure the past ULIP performance of the one that you are planning to buy. There are also goal-based ULIPs available in the market that meet the specific goals of the policyholder.
What is premium redirection?
ULIPs come with a lock-in period of five years. Within that tenure, you cannot withdraw any funds from your plan. The fund allocation in your ULIP depends on your risk tolerance and financial objectives. For instance, if want to earn high returns, you will take a high-risk appetite, and invest in equity-based funds. Since ULIP insurance is a long-term investment, it is possible that after some years, your risk appetite reduces, and you want to change your allocation. In such cases, the corpus that you have accumulated over the years by investing in equity funds can be transferred to debt funds. Also, it is possible that you had previously invested in debt funds and that your risk appetite may have increased. ULIP allows you to switch from debt funds to equity funds in such cases. The feature of a ULIP where you can switch from debt to equity or vice versa is known as premium redirection. Most insurance providers allow free premium redirection at least two to three times during the duration of your policy.
After a year of your ULIP insurance, you can redirect your premium anytime you want. You can change fund allocation and create a new allocation comprising funds of your choice. When you change your fund allocation, it is essential to know that your existing fund does not change. The premiums that you pay after your premium has been redirected are utilized for investing in your new fund.
Is premium redirection and premium switch the same?
The meaning of premium redirection and premium switch is quite different. A premium redirection in a ULIP is when you choose to change how your future funds will be allocated. For example, the current premiums that you have been paying have been 100% invested in equity funds. However, after a few years, you can redirect your premium to 100% debt funds. You get to choose the funds you want to invest in and the proportion of your investment. It is important to know that redirecting your premium will affect your ULIP performance.
A premium switch is a different concept. In a premium switch, the units of your ULIP are moved from one fund to another within the existing plan. For example, if your ULIP investments are completely in debt funds, you can partially or completely shift your ULIP units from your debt fund to an equity fund. This is a retrospective change, as it rebalances your previous investments, causing no changes in your future investments. The units of your ULIP do not change here, only the allocation where it is being invested changes.
When should you use premium redirection?
Usually, after you have paid your first ULIP premium, you can ask for a premium redirection anytime you want. Most insurance companies offer one or two premium redirections in a year. Since the future premium allocations and past premium allocations have no connection in a premium redirection, there are no charges levied. Investors choose premium redirection when they see potential in the market and want to invest in it in order to raise their fund value. Premium redirection is a feature of ULIP that allows you to make the best choices in the different stages of your life when it comes to investment.