Unit Linked Insurance Plan (ULIP) is a combination of insurance and investment. The purpose of ULIP is to provide wealth creation along with life cover where the insurance company puts a small portion of the investment towards life insurance and rest into a fund chosen by the Life assured, that is based on equity or debt or both and matches with his/her long-term financial goals.
How does ULIP work?
When one makes an investment in ULIP, the fund managers in the insurance companies manage the investments by investing a small part of the Premium towards life insurance and the balance amount into the market. These investments are made into various funds opted by the customer at the time of taking the policy. Therefore the investors are spared the hassle of tracking their investments. ULIPS also allow the policy holder to switch his/or portfolio between debt and equity based on his /her risk appetite as well as the knowledge of market.
Lock-in-period of ULIP
One of the changes brought in by the Insurance Regulatory and Development Authority of India (IRDAI) in the year 2010 as regards ULIPs, is to increase the lock-in period from 3 years to 5 years. It is recommended to hold the investments for longer tenures or the end of the term to get better returns.
Why you should invest in ULIPs?
ULIPs provide life cover coupled with investment.
ULIP is a good investment option because the money gets compounded to meet long term goals like buying a house, a new car, marriage, etc. Net returns are generally more than investing in Bank deposit or post office deposits.
ULIPS are usually designed in a way that they allow the policy holder to switch the portfolio between debt and equity based on the risk appetite as well as the knowledge of the market. The number of switches you can make for free vary from Insurance company to company.
Key Features
The instalment Premium paid after deducting the term insurance component is invested as units in capital market either in debt or equity depending upon the fund chosen by the Policy holder. The Insurer allocates units to each policy holder in proportion to the invested money and this unit’s value is called NAV (net asset value).
Every Insurer has a fund manager who keeps track of invested funds.
The policy holder can switch from one fund to another fund during the term of the policy.
The minimum lock in period is five years.
Loan is not available in this policy.
The policy holder can surrender the policy for the net asset value prevailing after payment of minimum five years Premium.
At the time of maturity the Insurer pays the fund value depending upon the market value.
In case of death Insurer pays to the Nominee the higher of the Sum assured or the available fund value.
Critical illness cover as a rider is also available on this policy.
Partial Withdrawal: ULIPs have the option of partial withdrawal of funds with restriction on the number of withdrawals. Charges are applicable over the specified limit.
Charges in ULIP
Premium Allocation Charge
Premium Allocation Charge is deducted as a fixed percentage from the Premium paid in the initial years of the policy. The charges include the initial and renewal expenses and intermediary commission expenses.
Fund Management Charges
Fund Management Charge is the amount deducted by the insurance company for the management of the various funds in the ULIP before arriving at the NAV. The maximum charge allowed is 1.35 percent per annum of the fund value and is charged daily. Generally, Insurers levy the maximum charge allowed in equity funds, while the charge on non-equity funds is much lower.
Policy administration charges
This charge can be levied at a fixed rate or as a percentage of the Premium on a monthly basis by cancellation of units from all funds chosen.
Mortality Charges
Mortality charges are deducted on monthly basis from the units allotted to provide the life insurance cover. These charges depend on Sum assured, Riders opted for and age of the proposer. Higher the age, higher the charges.
WHO SHOULD BUY ULIPS
People who have a long term Horizon can invest in ULIPS as the returns beat inflation and give better returns when compared with the traditional investments like bank deposits, post office deposits, etc, in the long run.
Riders
Accidental Death Benefit Rider
Accidental Total and Permanent Disability Rider
Critical Illness Rider
Tax benefits
This policy not only offers protection but also offers Tax benefits under sec 80C, for the Premiums paid.
The Death Benefit paid in case of death of the policy holder is exempted under section 10(10D) of Income tax act 1961