Know the Difference between Fund Switching and Premium Redirection in ULIP

When you invest in a product, it is important for you to understand its features and functioning. Unit-Linked Insurance Plan (ULIP) is considered as an ideal investment option for many. It not only provides a cover for your life but also offers an opportunity to increase your wealth. When you invest in a ULIP, you can grow your investment over a period of time and also enjoy a cover for life. However, there are certain features of the policy, which you need to understand.

Firstly, you need to understand what is ULIP policy. It is an investment product where your money is divided into two parts; one part goes towards the insurance policy, and the second part goes into the investment fund, which you have chosen. ULIP allows you to choose a fund based on your risk appetite and investment criteria. You can choose to invest in equity, debt, or a balanced fund based on your requirements.

One of the biggest ULIP benefits is free switching between funds. In a ULIP, you are allowed to switch between funds without incurring any additional cost for the same. If you think that a particular fund is not performing well, you can switch from one fund to another. You will not have to pay any additional amount for the same. For example, you can easily switch from an equity fund to a debt fund if you want to reduce the market risk associated with the investment. However, you need to understand that there is a big difference between switching a fund and premium redirection in ULIP.

Many policyholders think that when they switch a fund, it will automatically mean premium redirection but this is not the case at all. A switch of the fund will apply only to the existing fund and will not apply to the future premiums. If you want the future premiums to go towards the new fund, you need to submit a separate request for the same. This means you will first have to make a fund switch request and then make another request for a premium redirection.

There is a reason behind this. The top-performing ULIP funds allow policyholders to not only participate in the performance of the capital market but also allow them to make asset allocations in different types of ULIP funds. Investors are allowed to review and rebalance the funds as per market conditions, their financial goals, and life stages. Hence, ULIPs will give the policyholders the ability to control their funds.

Let us take an example here. You have an equity fund in ULIP, which you purchased at a low Net Asset Value (NAV). This means you got more units for the premium amount you paid and now the fund has performed well, so its NAV has gone up. If you buy new units now, you will end up with a lesser number of units. This is why you think that switching to a well-performing debt fund is a good idea. At the time of your next premium, you need to give a fund switch request and a premium redirection request. You will have to give a premium redirection request to the debt fund and it is only considered with the future premium allocations and not with the current fund. The current equity fund will remain untouched and the premium amount will be used to buy units in the new debt fund.

With special requests for fund switching and premium redirection, it is possible to ensure that your investment portfolio functions as per your requirements.