It is a good habit to invest your hard-earned money in financial instruments to meet your economic aspirations. Out of the many financial products available in the market, investing in Unit-Linked Insurance Plan (ULIP) is one of the best ways to grow your wealth. If you are wondering about ULIP meaning, then learn its fundamentals by reading ahead.
ULIP is a unique type of insurance policy that secures your life and helps you in generating wealth through its investment component. One of the significant benefits of ULIP is its flexibility.
ULIP gives you the convenience to choose your preferred type of fund where you wish to invest. Moreover, you have the feasibility to switch your investment from one fund to another, making ULIP a sought-after investment instrument. These facilities help you to control your funds more effectively. Here, premium redirection plays a crucial role. It helps you shift your invested money between funds to minimize the risks associated with the markets and maximize your investment returns.
What is premium redirection?
ULIP policy enables you to move your investments from equity to debt fund or vice-versa based on the market’s performance. It means that you are changing the allocation of your prior investments and upcoming premiums in the fund option you prefer. This is known as premium redirection.
Let us take an example here to help you understand this concept in a better manner.
For instance, you had invested a part of your premium in 60% of equity funds and 40% in the debt funds. If the capital market is at the peak, and you want to switch 40% of your investment in debt funds to equity funds, the fund manager will transfer the equivalent units, as per your instruction.
Benefits of premium redirection
Premium redirection helps you to manage the risks of the equity market that can hamper your investment adversely. As this feature allows you to switch from one fund to another, it is easier to handle your investments and get the best out of them. Premium redirection safeguards your hard-earned money and limits the exposure of your investment to risks.
Effects of premium redirection
As the ULIP investment plan provides different portfolio management features, the effects of premium redirection may vary. For instance, many reputed insurers provide strategies like systematic transfer, safety switch option, auto fund rebalancing, and return protection. Unlike other methods that function through the tenure of your ULIP policy, the safety switch option only works during the last four years of your policy. When you submit a premium redirection request, the portfolio management strategies you had opted while purchasing a ULIP will stop.
For example, you have bought a ULIP where you invest INR 50,000 annually for 15 years with an auto-fund rebalancing strategy. If you want to redirect your premiums from the sixth year of the policy, the insurer will stop this strategy on receipt of your next premium. So, the auto-fund rebalancing option that is used to reorganize your fund allocation every three months will stop operating.
Is it essential to redirect premium?
No one knows how the market will perform in the future. ULIP investment is made with a long-term perspective. So, many circumstances will arise when you will need to redirect your premium to safeguard your investment.
It is time to redirect your premium if you have been investing aggressively in equity funds and if you feel that the time is right to exit. On the other hand, if you have a significant investment in debt funds and think that the equity market will perform well, you can switch from debt to equity funds.
If you want to maximize your investment returns, it is advisable to stay invested in ULIP for a minimum of 10 to 15 years. In such a vast timeframe, markets will witness numerous bullish or bearish trends. With the help of the ULIP premium redirection feature, you can manage your funds in a better way as per the changing trends of the capital market.