Unit linked insurance policy (ULIP), are insurance cum investment plans that offers the policy holder to have reasonably good returns in a long term while providing insurance protection.
ULIP = Insurance (Life Insurance ) + Investment (Mutual Funds)
It combine the benefits of life insurance policies with mutual funds. In a ULIP, part of the premium paid by the customer is used to provide insurance cover and the remaining amount is invested in the listed equities/debt funds/bonds in the stock market and fund management expenses. With this, you can choose the extent of life cover and investment you want.
ULIP Premium Amount = Life Insurance Premium + Stock Market Investment + Fund Management Fees And Other Charges
Depending on your risk appetite, you have the option to choose from host of funds having varied degree of risk exposure for investment which are equities, debt instruments and liquid assets. While ULIPs offer the opportunity to invest up to 100% in equity, you have the flexibility to shift to up to 100% in debt. Individuals are free to decide where they want to invest their money. For example, individuals with an appetite for risk can invest their entire money in equities while conservative individuals have the option to park their money in balanced or conservative ULIPs. The following are some of the common types of funds available along with an indication of their risk characteristics.
|Description||Nature Of Investment||Risk Level||ULIP variants|
|Equity Funds||Primarily invested in company stocks||Medium To High||Aggressive ULIP
(100% Equity Funds)
|Income, Fixed Interest, Bond Funds & Cash Funds||Invested in corporate bonds, govt. securities, cash, bank deposits & money market instruments & other fixed income instruments||Medium To Low||Conservative ULIP
(100% debt + money market instruments)
|Balanced Funds||Combining equity investment with fixed interest instruments||Medium||Balanced ULIP
(60% Equity Funds + 40% in debt market)
ALSO READ : Whether Go With ULIP Or Endowment Plan
Investors can pay their premiums annually, semi-annually, quarterly or monthly. They can alter the premium amounts during the policy’s tenure. For example, if a policy holder has surplus funds, he can enhance the premium in his ULIP policy. On the other hand, if a policy holder have a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). The best part is if the policy holder is not in position to make premium still policy don’t lapse, the unit values are redeemed to pay for your life cover premium, while retaining the basic life cover.
Unit Linked Insurance Policy Returns
Investment returns from ULIPs may not be guaranteed. In this, the investment risk in investment portfolio is borne by the policy holder. Depending upon the performance of the unit linked fund(s)chosen; the policy holder may achieve gains or losses on his/her investments.So even though you might have been insured for a sum of 2 lakhs, if your policy value at the time of maturity is only Rs 40,000, then you might end up getting only this much amount.
Unit Linked Insurance Policy Riders And Top-ups
Today, Ulips offer a choice between basic death benefit, death benefit plus fund value, or the higher of the death benefit and fund value. There are also riders that can be attached to enhance the scope of life cover you take. You can add riders covers like accidental death, medical expenses and critical illness. You can top up your premium at zero cost. The top-up amount should not exceed 25% of regular premiums paid till that time. If annual premium is Rs 20,000 the top-up after four premium’s should not exceed Rs 20,000.
ALSO READ : Difference Between ULIP And Mutual Funds
Unit Linked Insurance Policy Types
- Type 1 : In this, policy holder will not receive benefits from both insurance & investment. At the maturity period, policy holder will get benefits from either investment or the insurance section of the ULIP, which ever is higher. Premium amount is lower for Type 1 as compared to other ULIP types.
- Type 2 : This is same as Type 1 ULIP except this plan pays the policy holder both benefits i.e benefits from insurance section of ULIP and benefits from investment section. For this you need to pay a higher premium as compare to Type 1 Plan.
- Retirement or Pension ULIPs : This works as other ULIP plans with some differences. Instead of paying benefits as a lump sum at the time of maturity this plan pays in installments after set retirement age.
- Children’s Education ULIPs : This works as other ULIP plans with some differences. It intends for your child’s education finance requirements. For this you must plan and invest accordingly based on your child’s present age. Many critical riders are available for this plan based on many unfortunate events that can occur to parents. Ex: If the parent dies in between the policy period a rider will get active and the child will still receive funds for his/her education as per ULIP fund value.
- Health Insurance ULIPs : Purpose of this plan is Health insurance coverage other than death claim. Various critical illness and disabilities are covered and treatment options are available. A number of variations can be expected from company to company.
ALSO READ : Whether Go With ULIP Or Endowment Plan
Unit Linked Insurance Policy Charges
Different companies charge different amounts for varied ULIP plans. Broadly, the different types of fees and charges are given below.
- Premium Allocation Charge : This is the major charge collected by any ULIP issuing company. This is the initial unit allotment and renewal charges collected from a policy buyer before allocating his funds under various asset classes. This will be deducted initially from premium at the time of buying a ULIP.
- Mortality Charges : These are charges collected against insurance coverage and the amount collected varies from person to person based on age, health, amount insured etc.
- Fund Management Fees : A fees collected for managing your funds under various asset classes. This is deducted before arriving at the NAV.
- Administration Charges : A charge collected for administration of funds and is collected by cancellation of units.
- Fund Switching Charges : Some companies allow a minimum number of fund switches a year without cost but if exceeded the minimum number they will charge. It varies with company and type of ULIPs.
- Surrender Charges : Charged for premature withdrawal of funds either partial or full.
- Service Tax : Service tax is as per current rules. (Tax exemption for long-term capital gains and 10% for short term capital gains). ULIP’s come under section 80C of the Income Tax Act.
- Investment by an individual in the scheme is eligible for deduction from the income under section 80C of the IT Act 1961.
ULIP Vs Traditional Insurance Policies
|Investment||High exposure to bonds and no choice to hike equity exposure||Policyholder can choose exposure to equity, debt|
|Transparency||No transparency on cost||Transparent cost structure|
|Alter scope of cover||No change possible in sum assured and premium||Freedom to enhance life cover, top-up premium|
|Changes||Variable charges through the term of the policy||Flat charges throughout the term|
|Vary exposure to risk||No option for policyholder to alter exposure to risk||Possible to switch between fund options|
|Liquidity||Policyholder can take loan against the policy||Partial withdrawal allowed after three years|
|Policy value||Complex calculation to arrive at paid-up value after 3 years||Surrender value indicated at the end of each policy year|