Life Insurance Simplified

Unit Linked Insurance Plan (ULIP)

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Many people want to have an investment option which offers high returns coupled with a high insurance cover. Keeping in mind the needs of its customers, insurance companies came up with ULIPs. The first ULIP in India was launched by Unit Trust of India (UTI) in 1971. In 2005, post major guideline reforms, a lot of companies started offering ULIPs for those who were looking for an insurance cum investment product.

What is a ULIP?

A Unit Link Insurance Plan is basically a combination of life insurance and investment. A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) in varying proportions just the way it is done for mutual funds.

Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and risk appetite. Just the way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a Net Asset Value (NAV) that is declared on a daily basis. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.

* The NAV is the value based on which the net rate of returns on ULIPs are determined.

In a ULIP, the premium paid by the life assured will be converted into units after deduction of charges like fund management charges, mortality charges, monthly charges etc. These charges are clearly mentioned on the company brochures and are also shown in the benefit illustration.

The number of units that one gets is equal to the premium less miscellaneous charges divided by the NAV.

The premium, inclusive of fund management charges and mortality charges, is invested in various funds provided by the life insurance company. These funds range from pure equity to pure debt funds. There are other funds which are a mix of equity and debt instruments at certain percentages. For example, a growth fund may have 60% equity exposure and 40% debt exposure. Based on the risk appetite of the life assured, he can select from any one or from a multiple of funds.

Why invest in Unit Linked Insurance Plan?

Higher returns: Over longer periods of time, getting 15 to 20% return is possible. In the long term, a ULIP starts beating inflation.

Higher flexibility in

  • Premium term: The premium payment period ranges from single premium to 5 years and above years. In case of limited and regular premium, monthly, quarterly, semiannual and annual payment options are also available.
  • Partial withdrawals: In case of financial emergency, a person need not surrender the whole policy. A provision for partial withdrawal is available and is generally up to 25%. In partial withdrawal, the sum assured will remain the same.
  • Partial surrender: In case of partial surrender, the sum assured is also reduced in proportion to the surrendered amount. In such a case, the policy continues but at a reduced sum assured.
  • Insurance cover level: The sum assured is a minimum of 10 times of the annual premium paid. But in case you want to increase the sum assured, then it is possible.
  • Investment options: The policyholder can redirect the future premiums to any of the funds available under the plan. The redirection can be single fund or in multiple funds with set percentages.
  • Switching between funds: The policyholder has the option to switch between funds. Generally, insurance companies give 2 free switching options in a year. Do note that switching funds attracts charges.

Addition of riders: Attaching of various riders is possible.

Easy liquidity: After a lock in period of 5 years, the policyholder has the option of surrendering the policy. The options of partial surrender and partial withdrawal increase the liquidity of the plan.

Higher ‘death cover’ at lower costs: Mortality costs are based on attained age concept whereas in traditional insurance plans it is based on level premium concept.

Mortality premium charged on sum at risk basis: There are policies in which sum assured or fund value, whichever is higher, is paid in case of death. As the policy holder keeps on investing in the policy, the fund value keeps on increasing, thus decreasing the sum at risk to the company. The mortality charges are calculated on sum at risk which is equal to sum assured minus fund value. After the fund value becomes equal to or more than the sum assured, there is zero risk to the company and hence no mortality charges are levied.

Transparency: Unlike traditional life insurance plans, where the policyholder only knows about the premium, sum assured and maturity date of the policy, ULIPs have to show all the charges which will be deducted. It is mandatory by law to do so.

Top up premiums allowed: In case the policyholder has surplus money, he can use this facility to further invest in the same policy.

It is very important to remember that unit linked insurance plans are not short term plans. One should be prepared to stay invested for a fairly long period of time. Choosing a monthly mode premium (systematic investments) will increase your returns because of RCA (Rupee Cost Averaging).

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