One of the important reasons for the growing popularity of ULIPs is the flexibility of investment they offer to the policyholders. Premium redirection is one such feature in ULIPs that gives policyholder greater control on how their investments should be utilised in their portfolios.
Investment Allocation in ULIP
Your ULIP premium can be invested in any of the different funds operated by the parent insurance firm as per your age, goal, risk appetite, etc.
For instance, your ULIP investments will have more exposure to an equity-oriented fund if you want high returns irrespective of the risk involved. Conversely, a major part of your ULIP portfolio will be invested in debt and money-market instruments if you are a risk-averse investor.
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Premium Redirection in ULIP
Premium redirection is an important feature in ULIP where you can allocate the future premiums to a fund that is different from your existing funds. You can also modify the allotment percentage of the upcoming premiums over the various fund types.
Premium redirection doesn’t affect your previous investments in ULIP, meaning they will remain in the same fund as before. The insurer will only use your future premiums to purchase units of different funds in the new proportion as per your choice.
It should not be confused with fund switching. Unlike premium redirection, which only affects the future premiums, fund switching allows you to transfer your past fund to a new fund of your choice within the same ULIP.
When Should You Consider Premium Redirection?
Get Past the Short-term Volatilities
Consider a situation where you have spent a long term staying invested in ULIP. All this while, your ULIP portfolio had substantial equity exposure that helped you greatly in wealth creation. But, now you are approaching the retirement age and want to preserve your wealth. Also, you are jittery about the prevailing market volatilities.
In such a situation, you may want to redirect your future premiums into safer bets like debts while keeping your past investments unaltered.
Search for Better Alternatives
You may want to check out how the new funds will perform. However, you don’t want to lose the existing fund that has prudently managed your portfolio till now. Therefore, your best option will be to use premium redirection for your ULIP, meaning you will not disturb your previous investments and only allocate the future premiums to the new fund.
Benefit from Changed Conditions
You might have started your ULIP journey at a macro economically depressing time when you considered it best to have greater exposure to debt instruments. However, now you think that you will benefit from the equity markets from here on wards.
Thus, you would like to gradually increase your equity exposure by allocating your future premiums to an equity-oriented fund.
While premium redirection is a vital feature in ULIP, you can’t use it indiscriminately. Firstly, you can avail of this feature only after completing one year of purchasing your ULIP. Secondly, you can use this feature a limited number of times as decided by your insurance firm.
Thus, use this feature prudently to optimise your ULIP returns across different market cycles.
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