Unit Linked Insurance Plans are not just flexible but smart investment plans that can do wonders when planned well. ULIPs provide the policyholder with a life cover and the opportunity to create wealth through investments in market-linked financial instruments. This help investors to achieve their financial goals like buying a property, your child’s education or marriage. These also serve as a suitable investment when you want to save for your retirement.
ULIPs allow their investors to choose from high-risk to low-risk funds. These funds can be equity, debt, liquid or balanced/hybrid funds. The funds need to be picked when the ULIP policy is purchased. But, there is an option where the policyholder can change the fund allocation. This can be based on their changing risk appetite or the prevailing market conditions.
This particular option to change the choice of the fund during the term of the policy is called premium redirection. Let us understand more about it in detail.
Table of Contents
What is Premium Redirection in ULIPs?
When you purchase the ULIP, you must specify the percentage of your premium that will be directed to the various fund kinds. You can, however, adjust how you want to allocate your premiums among various asset classes when economic conditions or financial demands change.
Premium redirection in ULIPs allows you to change the funds into which your future premiums will be invested. It also allows you to change your future premium allotment percentages among different fund kinds. Your insurer distributes your incoming investments to the various fund units at the new ratio you specify with premium redirection. Your previous investments will continue to be held in the same funds.
When can the investors choose premium redirection?
Premium redirection is often opted for by the policyholder to reduce the risk and to obtain a good return on their investment. The changes are also made based on the financial goals of the insured.
Let us have a look at two situations to understand this better.
Premium redirection based on risk appetite:
Many investors start with a high-risk fund and move to a low-risk fund as the ULIP is near maturity. Another reason investor choose a low-risk option is their age or sudden financial commitment.
Premium redirection due to fluctuating markets:
The stock markets are very volatile. When the ULIP has more funds in equity, the risk is higher. When the markets are unstable, the risk increases, so to avoid such a risk, the fund option can be changed to a debt or a balanced/hybrid fund. It can be re-changed to equity once the market stabilize.
How is a premium redirection different from a fund switch?
At first glance, fund switching and premium redirection look the same. They are, however, quite different from one another. Premium redirection differs from premium switches in ULIPs. Premium redirection occurs when investors use the opportunity to change how future payments in ULIPs are allocated to various funds accessible for investment. For example, your total premium may be allocated to the equity portion of your ULIP. If you want your portfolio to be split evenly between debt and equity after a few years, the premium redirection option can help. This feature is primarily prospective.
On the other hand, a fund switch occurs when units in your ULIP fund are transferred from one fund to another within the same ULIP. This is retrospective in nature. For example, if you believe that a particular fund is losing money, whether it is invested in equity or debt, you can switch funds. As a result, losing funds can be deleted, and your capital transferred to a different fund where you believe you will make money.
When to utilize premium redirection in ULIPs?
You might have understood the right time to redirect your funds in a ULIP. However, certain rules require that you only redirect premiums after the next due date of your premium. As a result, your future ULIP premiums have no bearing on your previous premiums. As a result, there are no fees for premium redirection in ULIPs. Nonetheless, regulations stipulate that you can only perform two such redirections in a calendar year.
When investors see opportunities to increase the value of their funds in the markets, this is an excellent opportunity for a premium redirection. However, even if you see equity rising, you may believe you are taking too much risk. Thus it is advisable to invest in a moderate amount of equity.
Conclusion: How useful is premium redirection?
Premium redirection helps reduce risks and also reap benefits from the present market opportunities. As mentioned, the changes can be made based on the risk appetite and goals of the investor.
ULIPs are excellent for long-term investment. You not only obtain a life cover but can also provide much-needed financial security to your family. So, make sure to plan well and understand the features and charges of ULIPs before investing. You should also use a ULIP calculator to determine the amount required to invest in obtaining a specific return.
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