The insurance sector is no more limited to traditional plans such as term and endowment. The evolution in the insurance sector has wiped out people’s dependency on traditional plans and has provided them with various other options to choose from. This has resulted in the increase in the product portfolio of the insurance companies and allowed both buyer and insurers to grow and get benefited together. One such product which has come out of the evolution of the insurance sector is a Unit Linked Insurance Plan (ULIP).
A ULIP is a financial product which gives you a life cover along with flexible investment options. The features of ULIP are almost similar to mutual funds and the only thing which makes a ULIP differ from mutual fund is the life cover provided in it. In the year 2010, a turf war went between IRDAI and SEBI over the regulation of ULIP and finally, after the involvement of the government, the dispute settled down. The government issued an ordinance, which ruled that ULIP will be regulated by IRDAI, an insurance regulator in India.
How does a ULIP work?
A portion of the premium which you pay is kept aside for your life cover and the rest is invested in debt and/or equity, according to the preference and risk appetite of the policy holder. You get three options of investment in a ULIP plan: equity, debt and hybrid (equal investment in both equity and debt). X numbers of unit are allocated depending on the Net Asset Value (per unit cost) of the fund opted. Through the exposure to both equity and debt, the policyholder is able to take advantage of both the instruments in a flexible way.
What are the types of fund investment options under ULIP?
There are different types of funds offered in ULIP so that the policyholder can choose according to his risk appetite and financial objective. The risk involved and the amount of return associated with each type of fund is different. Following are some of the most common funds offered in a ULIP-
- Equity Funds
- Debt Funds
- Balanced or Hybrid Funds
The nomenclature of the funds might vary from plan to plan and as per the allocation towards equity and debt investment options. The policyholder may invest in the combination of funds also allocating say 40% in equity based fund and 60% in the debt based fund or may choose another such combination. The minimum allocation in each fund is 20% for most of the ULIP’s and it may differ depending on the plan opted.
What are the advantages of investing in ULIP?
Following are the key advantages of investing in a ULIP:
- Dual Benefit– ULIP’s allow you to offer the dual benefit of life insurance plus investments. It is an umbrella policy which offers financial protection in case of the untimely death of the policyholder to the family members and also allows you to create a corpus for the accomplishments of the financial goals in the future.
- Choose as per risk appetite – The options of investment given in a ULIP allow the policyholder to invest according to his risk appetite. So, you have the option to invest in equity funds, debt funds or balanced funds that involves high risk, low risk or moderate risk.
- Transparency – Unit linked insurance plans are transparent in nature, unlike traditional plans. The policyholder can clearly see how much amount of his premium share is deducted for various charges and how much amount of money is invested. The transparent nature of the plan gives a clarity to the policyholder about the allocation of his invested amount.
- Flexibility – The flexibility of the investment option is a great advantage in ULIP. It allows you to switch between debt and equity fund as per the market and investment landscape. In a situation of ambiguity, you can invest in debt fund and whenever the market performs well, you can switch to an equity fund or redirect your future premiums as per your new investment pattern among the funds.
- Top ups —Top up premium is the extra premium amount over and above your basic premium amount which allows you to boost your investment. It allows you to enhance your invested amount and there by increasing the total fund value.
- Long Term investment– The 5 year lock-in period of ULIP makes it one of the best long term investment options. So, if you terminate the policy after 5 years, the amount received upon termination will be far greater than what you could have got upon just saving that money without investment.
- Expert Fund Management– Even if you are not a market savvy person, the fund managers associated with the life insurance company take care of your ULIP investments as they possess the best technical expertise, market knowledge, financial experience to your invested amount.
- Partial Withdrawal– ULIP allows you to partially withdraw amount from the accumulated fund value after the completion of the lock-in period. Partial withdrawal allows the policyholder to combat unexpected financial exigencies with ease.
- Tax Benefits– Most of the investment options don’t give you any tax benefit, but a ULIP gives you the tax benefit under section 80 C and 10 (10 D) of the Income Tax Act. So you can save on taxes and grow your money together.
What are the types of charges under ULIP?
There are following set of charges which are applicable to ULIPs:
- Policy Administration Charges
Such type of charge is deducted for servicing and maintaining the policy. These charges are deducted with a monthly frequency.
- Premium Allocation Charges
Premium allocation charges are levied on the premium amount before the amount is being allocated as per the fund chosen by the policyholder on account of varied expenses pertaining to issuance of the policy, like medical expenses, intermediary commission, fees, etc.
- Fund Management Charges
The Fund Management Charges are applicable for the management of the fund(s) as opted by you. These charges may differ for the different types of funds. Typically, for equity based funds, the charges are more and for debt related funds, these charges are comparatively lesser.
- Mortality Charges
Mortality charges are levied by the insurance company for providing the life insurance coverage to the policyholder. Such charges are charged on a monthly basis. The mortality charges are dependant on the parameters like age of the life insured, the sum assured opted under the policy, current health condition, etc.
- Surrender Charges
These charges are applicable if the policyholder wants to surrender the policy before the stipulated period as mentioned in the policy terms. Such charges are deducted as a percentage of the premium or the fund value and varies as per the year of surrender.
- Fund Switching/ Redirection Charges
The policyholder may switch or redirect his investments in a policy year as per the market conditions or your financial goals. The number of free switches or premium redirection offered in a policy year may differ from one plan to another, but beyond that it attracts a charge on account of costs incurred in switching or redirecting your funds.
What are the key points to look before investing in ULIP?
Following are the key points which one needs to look while investing in a ULIP:
- Features and benefits
- Investment fund options
- Past performance of the funds
- Applicable charges
- Payment on premature surrender
- Online buying availability
- Lapsation and its consequences
- Read the policy document carefully before investing
A ULIP plan gives you the dual benefit of life insurance and investment. The flexibility and transparency of investment in ULIPs allow the policyholder to choose his investment, according to his risk appetite and financial objective. Search and compare ULIP online and choose the best one for you, so that you can grow your money while getting insurance cover under the policy.