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Everything you Should Know about Premium Redirection in ULIPs

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October 21, 2022

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In this policy, the investment risks in the investment portfolio is borne by the policyholder

Over the course of time, ULIPs have evolved into productive investment instruments. They are hugely popular as they offer dual benefits of investment and life insurance cover in a single plan. The clear benefits of a ULIP are financial protection for your family, and investment with long-term wealth growth via market-related gains.

What is a ULIP plan?

ULIP is the acronym that represents the term Unit Linked Insurance Plan. It is a plan through which a portion of the premium gets allocated for insurance cover and the other part is invested in securities in the markets. Funds that a ULIP invests in can be chosen by investors, based on their risk appetite, horizon of investment and unique financial aims.

Based on any investor’s preference, investments in debt, equity or hybrid funds can be chosen for the investment section in a ULIP. A ULIP has a lock-in period which lasts 5 years. After this period, a partial or full withdrawal of funds is possible without penalties. ULIPs are good as they offer benefits where taxation is concerned. If you wish to invest in a ULIP, you should be knowledgeable about certain concepts related to ULIPs, like premium redirection in ULIPs.

What is the premium redirection in a ULIP policy?

When you opt for any insurance product, you have to pay a premium in exchange for what the policy of your insurance covers. In a life insurance policy, you pay a premium (yearly) so that the insurer can give you life cover. The premium also keeps the policy active. In a ULIP, part of the premium is allocated to investment and part of it goes towards your life insurance cover.

The premium redirection in ULIPs comes into play when you wish to change your investment allocations. Let’s understand this better. Every ULIP has five-year lock-in duration. When you make investments with a ULIP, you do so based on your risk appetite, tenure of investment and distinct goals. For example, if you have high tolerance for risks, and want equally high rewards, investment in equity will suit you.

Now, let us assume that you feel you have collected enough of a corpus after your lock-in term, and your ULIP has performed considerably well. However, at this time, market conditions may not be in your favor to redeem your mutual fund units. Therefore, you may not be prepared to take risks and sell. Furthermore, in case you are close to retirement, you may want to shift your wealth allocation so that risk is mitigated and your funds are safeguarded. In such circumstances, you can move your investment into a scheme that is based on fixed income and avoid market fluctuations. You have, in effect, undertaken premium redirection in ULIPs. You have redirected the allocation of your funds to assets which give you more protection when you need it.

After a year has passed since the beginning of your ULIP term, you can opt to redirect your premium for the future. Going forward into your plan, you can choose to change your fund allocation from equity to debt or vice versa.

How is the premium redirection in a ULIP policy different from a premium switch?

In ULIPs, there are many terms that may confuse you. You should have some clarity on similar sounding concepts which may mean entirely different things. Premium redirection in ULIPs is distinct from premium switches. What premium redirection translates to be when investors choose the option to alter how future payments in ULIPs are allocated to a range of funds available to invest in. For instance, you may have your total premium allocated to the investment part of your ULIP in equity. In case you wish your portfolio to be split with debt and equity in a 50%-50% ratio after a few years, this is possible with the premium redirection feature. This feature, essentially, is prospective.

In contrast, a premium switch is what happens when units in your ULIP fund are shifted from one fund into another fund in the same ULIP. This is a retrospective move. For instance, if you feel that a particular fund is making a loss, whether it is invested in equity or debt, you can change the fund to be invested in. Therefore, loss-making funds can be eliminated and your capital allocated to a different fund where you think you will stand to make gains.

When to do premium redirection in ULIPs?

You may have already gauged when to redirect your funds in a ULIP. However, certain rules dictate that you can only undertake this redirection of premiums after the next due date of your premium. Whatever future ULIP premiums you pay do not have any bearing on your past premiums. Therefore, no charges are levied for premium redirection in ULIPs. Nonetheless, regulations state that you can only undertake two such redirections within the span of a year.

An ideal time for a premium redirection is when investors view potential to raise their fund values in the markets. Even if you see equity on the rise, you may think you are taking too much of a risk, so it's better to invest in a fair degree of debt too.

Conclusion

Premium redirection in ULIPs must be done after carefully assessing the value of investment in your plan. Choosing the correct ULIP for investment is also necessary before you select this plan. Many ULIPs have different benefits, and these depend on your insurance provider. You can do some background research and then go in for the ULIP of your choice. 


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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimer

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully before concluding a sale. Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company; name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

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