Emergencies can happen any time and they can be of any kind. If something unfortunate were to happen to you, your family would be left in a vulnerable state financially. If you are an earning member of your family, it becomes your responsibility to prepare a financial safety net for your loved ones. Getting a life insurance policy is one of the ways you can ensure your family’s financial safety in your absence.
Among the different life insurance plans that are at your disposal, ULIP is a reasonably popular one. The premium of the plan is used to create investment as well offer life insurance. However, when it comes to the investment aspect, you have the option of either redirecting it your premium or switching it. What is the difference between the two? Which one should you opt for? Keep reading to know more.
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What is a ULIP?
A ULIP, i.e., a Unit-linked Insurance Plan is a type of life insurance plan. In this plan, the policyholder gets to enjoy the dual benefits of investment and insurance under the same plan. The premium paid towards this plan is used to finance both these components. In the investment component, you get to invest in different types of market funds such as equity and debt funds. Each fund has its own risk factor and rate of return. The investment is done on the basis of your risk appetite and your requirements.
In the insurance component, your dependents, i.e., your family are provided with a life cover. The sum assured in this cover will be provided to your family in the case of any unfortunate event during the plan’s term. This amount can be used by them to cover daily expenses and using it as a secondary source of income.
Premium redirection: what is it?
When you invest in a ULIP, the allocation of premium towards the investment component is based on your risk appetite and requirement. For example, you can decide to allocate all of your premium towards equity. Equity options are known to be high yield as well as high risk. In the beginning, you may get good profits from your investment in it. However, over time, your risk appetite may reduce, and you may wish to safeguard the value of your fund while at the same time wanting consistent returns. In this situation, you can consider debt funds, which have a lower risk factor and are known to offer consistent returns to the investor.
If you wish to redirect your premium from one fund to another, you can take advantage of the premium redirection feature. With this feature, you can redirect your future premiums into a different fund. So, if you wish to redirect 50% of your premium into debt funds after some point, you can do so with this feature. It is beneficial to remember that premium redirection happens during the following premium cycle.
What is fund switch?
ULIPs allow you to invest in different funds. For example, you can invest 60% in equity and 40% in debt. However, the market volatility after a few years can make you want to switch your fund due to the fear of its impact on your fund. This can be done with a fund switch. In this option, either you or your fund manager simply moves 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 60-40, with the help of fund switch, that many number of units will be shifted from equity to debt. The reallocation of your funds is done as per your instructions.
What is the difference between the two?
Units are moved from one fund to another in fund switch. Whereas in premium redirection, you get to choose how your future investments will be like. Switching of funds does not stop you from redirecting your premium. It does not impact your current investment. Both the features let you enjoy the benefits of this life insurance plan.
The information given above should help you get a basic understanding about the difference between these two features of ULIP. If you wish to put your money in a life insurance plan to reap all its benefits, you can use the life insurance premium calculator before making the purchase to see how much your premium would be based on your requirements.
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