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Unit Linked Insurance Plans(ULIP)

A very popular plan in an insurance company’s kitty is a ULIP. ULIP plans give an individual the freedom to explore the capital market for investments while at the same time bestowing the all-too-important risk coverage. At a time when the share market and mutual funds were dominating individual’s investment portfolios, ULIPs were launched by insurance companies to lure customers with the promise of high investment returns. Today, ULIPs have become popular among many investors as these plans provide the dual benefit of insurance cover and wealth maximization. So, let us understand the concept of ULIPs in details.

What is ULIP (United Linked Insurance Plan)?

ULIP or Unit Linked Insurances Plan is an insurance product which not only offers risk coverage to the policy buyer, but also provides the buyer with investment opportunities. It gives the investor a platform to invest in various investment instruments such as stocks, bonds as well as mutual funds. It is basically a two-in-one plan which aims to offer investment as well as protection to investors depending upon their individual requirements. As a single integrated plan, the investment part and the protection part can be managed according to specific needs and choices.

How does a Unit Linked Plan work?

Unit linked plans are the most productive options for investment. Here, part of your premiums are invested in market linked assets that offer you considerable returns and the balance is invested in life insurance.

Let’s see how a ULIP works:

You pay the premium to invest in the ULIP. There are several other investors too who pay the premium and invest in the same portfolio. The insurer further pools this money and deducts the expenses and invests the balance money depending on the type of funds chosen. These funds can be invested in either equity, debt or balanced funds.

This total corpus is further divided into units with a certain face value. The insurer allocates ‘Units’ to each investor in proportion to the invested money. This unit is termed as ‘NAV’ or Net Asset Value. Every insurer has a fund manager to keep a track of your funds invested. With the market performance, these units either increase or decrease, resulting in a higher or a lower NAV.

On the maturity of the ULIP, the insurer pays you the fund value depending on the market value. In case of any unforeseen situation like death, the insurer pays your nominee the higher of the sum assured or the available fund value.

Importance of Unit Linked Insurance Plans (ULIP)

ULIP plans offer an opportunity for a long-term investment. It comes as a complete package, which provides life insurance cover to the life assured plus wealth creation. Over a period, unit linked insurance helps you in achieving your financial goals. And in case of an untimely demise of the life assured, the insurance company pays the sum assured to the nominee as mentioned in the unit linked insurance plan document.

Generally, the life cover offered in a ULIP plan is 10 times the annual premium. For instance, if you pay Rs.25, 000 as an annual premium for a unit linked insurance plan, you will get a guaranteed death benefit of Rs.2.5 lakh. And as a maturity benefit, you get the fund value.

You can invest as per your risk appetite. Because ULIP plan offers a complete transparency through Net Asset Value (NAV), which helps you to keep a track on all your investments. Also, it helps you see how your funds are performing. Furthermore, you can increase your investment and coverage with an additional investment opportunity through top-up that is allowed in the unit linked insurance plan.

You can switch funds if you think funds are not performing. You have various options to invest in like bonds, equities, debts, market funds, hybrid funds, etc.

With the help of the maturity benefit, you can plan your long-term financial needs. The best ULIP plan provides you with the option of multiple fund options, partial withdrawal, and top-up.

Basically, unit linked insurance plan is in a way a long-term systematic investment plan. The best ULIP plan can help you to meet financial goals at different life stages. For instance, planning for your child's future educational fees or planning your retirement.

The unit linked insurance plan also helps in getting tax exemptions. All the premiums paid towards the unit linked insurance plan qualify for an exemption. The death benefit paid to the nominee is tax-free.

Suitability of ULIPS

Even though ULIP’S can be purchased by anybody, it is advised for the following group of individuals to invest in the same, so as to reap maximum benefits out of it and to avoid loss.

Investors who wish and can afford to keep a close track on their investments: One advantage of ULIP is that it gives an investor the freedom to closely follow and manage their investment portfolios. ULIP’S let an individual switch between various funds and invest as per their risk taking capacity.

Investors who wish to avail for a medium or long term investment opportune: In order to reap maximum benefits out of an ULIP, it’s better to continue the investment for a long period, hence; it’s advisable for individuals who can afford to keep their investment blocked for a longer period to invest in an ULIP.

Investors with varied risk appetites: ULIP’S offer a choice of funds to its investors. It is available for investors who are risk averse as well as for individuals who have a very high risk taking capacity. ULIPS allows the individual to invest in equity as per their requirement i.e. the equity component may vary from zero to 100%.

Investors in different stages of their lives: It offers to invest in various plans depending upon one’s financial requirement and liabilities as per their age and their immediate responsibilities.

Features of Unit Linked Insurance Policy

ULIPs provide more flexibility than a normal Life Insurance Policy. Here are the features of ULIPs which make it a desirable Life Insurance Policy.

Life Insurance Cover: Apart from being an investment plan the basic purpose of a ULIP is serving as a life cover for the policyholder.

Investment and Returns: Since portions of the premiums paid by the policyholder are used for various types of investments, ULIPs are considered to be investment plans with decent returns.

Flexible Premiums: In a ULIP, the policyholders have freedom to increase or decrease the amount of premium based on the financial condition and choice of the insured. Some insurance companies allow this option after completing a certain time period upon the purchase of a ULIP. Top-ups are also offered by many ULIP schemes.

Freedom to choose the kind of Funds: The part of the premiums paid by the policyholders are invested into funds like bonds, stock markets etc. A policyholder can choose the type of fund he/she wants to invest in based on the risk appetite of the policyholder.

Easy Withdrawals: After a certain amount if time of buying a ULIP the policyholder can withdraw some parts of the funds after paying the withdrawal charges.

Premium Top-Ups: If the policyholder wishes to increase the amount of premiums being paid for the ULIP, he/she can do so by using the Premium Top-up feature of this plan.

Additional Riders: Like other Life Insurance policies a ULIP also offers the benefit of choosing from a number of additional riders. You may choose riders such as critical illness rider, major illness rider etc. to enhance your base plan.

Benefits of ULIP

Market Linked Returns: ULIP is an apt insurance plan for individuals who wish to earn market linked returns. The premiums paid towards a ULIP are invested in different funds which are linked to the capital market and which offer good growth opportunities.

Dual Benefits: ULIP not only offers market linked returns but also gives an investor the benefit of life insurance. It acts as an investment as well as a protection plan. It helps an individual build wealth in the long term alongside taking care of his personal insurance needs.

Flexibility: ULIP's offer flexibility in the following ways:

  • It allows the investor to switch between funds and match his funding needs.
  • It allows the investor to make partial withdrawals; however, it may attract charges and is subject to certain terms and conditions.
  • It allows the investors to make single additions to their premiums and increase their investments at any point of time, through the facility of top-ups.

What are the types of ULIP Funds?

ULIPs are one of the best financial instrument offering you both investment as well as insurance. The funds invested are divided into low-risk funds, medium-risk funds and high-risk funds.

Here are some of the most common types of market-linked funds:

Fixed Interest and Bond Funds: These kind of funds give returns in a timely manner. For Fixed and Bond Funds Insurance companies invest in debt funds, corporate bonds, government securities, etc. The risk factor in these funds is slightly high than Cash Funds. These funds are a combination of secured and unsecured investments.

Cash Funds: Cash funds are considered to be the safest kind of investment. Cash funds are also known as money market funds through which the policyholder will receive a set amount of returns upon maturity. These funds fall in the low-risk category.

Equity Funds: These are considered to be of a high risk value. Insurance companies invest money in the stock market with an expectation of receiving monetary benefits.

Balanced Funds: These type of funds give a mixed advantage of safety as well as income through stocks. With the money paid through premiums, insurers invest in fixed component like corporate bonds and varied component like stock market. These funds fall in the medium-risk category.

ULIP - Premium Payment Options

  • Single Premium: The investor may opt for a single premium payment option, which requires him to pay the total premium due amount at one go as a lump sum payment at the time of purchasing the policy.

  • Regular Premium: The investor may also opt for periodical premium payment, i.e. he may choose to pay the premium due amount on a yearly, semi-annually or monthly basis.

  • Limited Premium: limited premiums require premiums to be paid for a limited tenure which is lower than the plan tenure. Limited premium plans are suitable for investors who do not want to pay premiums continuously for a longer tenure.

ULIP Charges:

While buying a Unit Linked Insurance Plan the policyholder is liable to pay certain charges which helps in keeping the policy active.

Administration Charges: These charges are used for the administration and maintenance of the policy. The Administration charges are either deducted on monthly basis on a fixed rate or vary through the policy tenure depending upon the insurance company.

Fund Management Charges: As the name suggests, the Fund management charges are imposed for managing the policyholder's funds. IRDA suggests that these charges cannot exceed 1.5% of the fund's value. The Net Asset Value is calculated after deciding the Fund Management Charges.

Premium Allocation Charges: This charge is calculated as the percentage of premium paid, in the initial years, by the policyholder. This amount is used for the initial setup of ULIP like cost of underwriting, distributor's fee etc. IRDA has capped these charges from the 5th year of a policy.

Policy Surrender Charges: If the policy is surrendered in the first 5 years of the tenure, the policyholder is liable to pay Policy Surrender charges. These are calculated as the percentage of accumulated funds and the premiums paid by the policyholder.

Mortality Charges: The policyholder's health status, age etc. are taken into consideration and a Mortality charge is calculated using the mortality table. Mortality charge is imposed for providing a Death Cover to the policyholder.

Depending on the insurance company from which a Unit Linked Plan is bought, the charges for Partial Withdrawal, Switching Charges, Guarantee Charges, Rider Charges, Premium Redirection Charges etc. may also be imposed.

Types of ULIP

Child ULIP’s:

Child ULIP’s are directed towards betterment of one’s child’s future by providing assured benefits as well as protection in case of premature death of the policyholder. A normal ULIP terminates on payment of a lump sum amount in case of death of the policy holder. A Child ULIP, on the other hand, doesn’t end there. In case of death of the parent, the insurance company waives off the remaining premiums while the plan continues. On maturity, the plan pays the maturity benefit meant for the child’s future.

Pension ULIP’s:

Pension ULIP’s are directed towards individuals wishing to save for a good life post retirement. Pension ULIP plans operate in two different phases. The investor pays regular premium to the insurance company till the chosen term. On maturity, called vesting, the policyholder can choose to withdraw 1/3rd of the accumulated corpus in cash and receive annuity payouts from the remaining corpus. Alternatively, the policyholder can also choose to receive the entire maturity proceeds in annuity.

Investment Oriented ULIP’s:

Investment oriented ULIP’s are directed towards wealth creation requirement of an individual. Such plans are generally recommended for individuals in their early stage of life. By opting for a higher tenure individuals can create a substantial corpus through these plans.

Various ULIP Plans offered by various firms:

ULIP PlanEntry AgeAllocation ChargesPolicy Admin chargesNo. Of Free SwitchMinimum PremiumBenefits
AEGON Life I maximize secure plans Min age: 7 years Max age: 55 years NilRs.100 per month4Rs.24,000 to Rs.36,000Available as an online plan Can be purchased directly with zero allocation charge.
SBI Life Wealth AssureMin age: 8 years Max age: 65 years 3% of single premiumRs.45 per month2Rs.25,000 to Rs.1 lakh Offers Guaranteed returns as well as choice of funds
Max Life Fast Track Growth FundMin age: 18 years Max age: 50 years 2% of single Premium 4% of annual premium Rs.1500 per year12RS.75,000 TO Rs.1.2 lakhOffers Income Tax benefit on premiums paid u/s 80 c and benefits on claims made u/s 10 D
PNB METLIFE Smart PlatinumMin age: 7 years Max age: 70 years Maximum of 1.25% per yearRs. 404RS.30,000 to Rs.60,000Flexibility to increase/decrease sum assured during the policy tenure Fund value is payable on maturity.
Bajaj Allianz future gainMin age: 1 year Max age: 60 years 0% to 1.25%Rs 33.33 per monthUnlimitedRs.25,000Offers Income Tax benefit on premiums paid u/s 80 c and benefits on claims made u/s 10 D
HDFC LIFE Pro Growth PlusMin age: 14years Max age: 65 years 2.5% of Annual PremiumRs.500 per monthUnlimitedRs.2500 to Rs.10,000Comes in two variants i.e. Life option and extra life option Offers 4 funds to choose from Offers Income Tax benefits
ICICI Pru Wealth Builder IIMin Age: 0 Max Age: 69 years 3% to 4%Rs.500 per monthNARs.24,000 to Rs.48,000Offers dual benefits in terms of making additions to ones wealth as well as offering insurance benefits along with guaranteed loyalty additions on regular premium payments.

Riders - You can buy with Unit Linked Insurance Plan

Riders help in increasing life coverage. They are paid features. Riders can be bought at a reasonable cost. These riders are of great value, because they increase the coverage.

Most Common Riders Available with ULIP Plans

Accidental Death Rider

If the life assured dies due to an accident during the policy duration, the life insurance company pays base plan sum assured plus the rider benefit to the nominee. Accidents are no more uncommon. Accidental Death rider provides a supplementary coverage to the life assured’s loved ones, in case an accident causes the death of the life assured.

Accidental Total and Permanent Disability Rider

An accident may not result in the death of the victim. But, may cause the victim to suffer from a permanent disability due to the loss of hands, legs, or both. This may result in a victim being a handicap or cripple. Consequently, the life assured won’t be able to work, earn money and pay the premium.

In such a case, the life assured with an accidental total and permanent disability rider gets the rider cover.

Critical Illness Rider

Critical illnesses like Cancer, heart attack, kidney failure, coronary artery bypass, paralysis, etc. are death threatening. The sufferer cannot work further. Moreover, the treatment of such illness is costly.

With a Critical Illness Rider on your side, all this is compensated with a lump sum benefit given by the insurance company. The payout is made when the life assured is first diagnosed with any of the critical illnesses as mentioned in the policy document.

Waiver of Premium Rider

Due to the accidental permanent disability or critical illness, your earning potential stops and income comes to a standstill. Consequently, you are unable to pay premiums for the rest of the term. If you stop paying the premium, your policy terminates. Once the policy terminates, one cannot claim, which means there’s no maturity or death benefit.

But with the waiver of premium rider, your premiums are waived off in the event of disability or critical illness during the term of your premium. Your policy continues with all benefits intact.

Difference between ULIP and Mutual Funds

POINT OF COMPARISONULIPMutual Funds
Type of productInsurance + Investment.Only Investment (no life coverage).
Tax-savingsPremiums paid towards the plan up to Rs.1.5 lakh are tax-free under the Section 80(C). The sum assured paid to the nominee would also be tax-free under the section 10(10D).Only ELSS based investments are tax-free up to Rs.1.5 lakh are tax-free under the Section 80(C).
InvestmentPart insurance – life cover and part invested in equity, hybrid, debts, bonds, equity, etc.Pure Investment.
InsuranceLife cover is providedNo Life Cover
RidersOption to get comprehensive and complete protection by adding ridersNot Applicable
ReturnsChances of moderate to high returns Net Asset Value (NAV) depends on the type of investment funds and on the performance of the market.Chances of high returns. Equity-oriented investment gives high returns. Depends on the allocation of funds and market performance.
LiquidityNeed to wait until completion of the lock-in period i.e. 5 years before exit.More liquid, except with ELSS which have a lock-in period of 3 years.
When to consider buyingWhen you want to provide financial security, and at the same time ready to accept investment risk.When you have disposal money and wish to gain high returns..
TenureDepends on the investor but for good returns on investment – 10 to 15 years.No specified tenure
Ideal TermLong term.Can be short, medium or long term.
Ideal Time to buyCan be bought anytime depending on the requirement and the amount one wishes to save.When one has lesser financial burden and have disposal money.
Switching OptionsFlexibility in switching fund allocations.No switching option
Lock-in Period5 yearsMost of the mutual funds typically do not have any lock-in period, except ELSS which have a lock-in period of 3 years. You can buy and sell mutual funds anytime, closed funds.
SecurityModerately SecureNot Secure
Fund Management ChargesHigher in the initial years up to 5 years, and later on, 1.35%Charges are 2.5%

Eligibility Criteria and Documents Required for Unit Linked Plan

  • One must meet the entry age criteria as mentioned in the policy wordings before purchase.

  • One can’t extend beyond the maximum age allowed under a ULIP plan. To exit you must be below the maximum age mentioned in the ULIP plan.

  • You must adhere to the plan’s premium payment term and mode.

Documents Required to Buy ULIP

  • Income proof - Salary slips, income tax returns, bank statement, etc.

  • Address proof - License, Aadhar card, Voting card, passport, etc,

  • Id proof - PAN card, Aadhar card, voting card, etc.

  • Age proof - Aadhar card, voting card, passport, driving license, etc.

Why should you buy ULIP?

Dual Benefit: A Unit Linked insurance Plan is one of a kind Life Insurance plan where a policyholder has the dual benefit of investment as well as life cover.

Systematic Savings: Some People often tend to postpone saving for major future needs like child's college education, future mortgage payments or even retirement funds. This can be avoided by buying a Unit Linked Plan which ensures that you save systematically for your future needs.

Tax Benefits: ULIPs are a superb combination of returns and protection. They offer tax exemption under Section 80C and 10(10D) of the Income Tax Act, 1961..

Choose the type of Fund: Not everyone is willing to take a risk with their hard earned money, this is where a ULIP is the best option to choose as a Life cover. Depending on the financial needs and risk appetite a policyholder can choose to invest in cash funds, equity, balanced funds etc.

Freedom to switch between Funds: Depending on the constantly changing life situations and financial needs the risk appetite of a person may also change. ULIP offers the freedom to switch between types of funds in such situations.

Tips to Choose the Best ULIP Plan

Choosing a ULIP plan is not easy. There are many unit linked insurance plans available in the market to choose from. And each unit linked plan has variants. Moreover, ULIP that is best for your friends and relatives, not necessarily best ULIP plan for you.

Tips on choosing the best ULIP plan:

1. Decide your financial goals before buying unit linked insurance plans - Specifically long-term financial goals.

2. Choose your investment options in ULIP plans wisely - equity, debt, or hybrid.

3. Choose your life cover appropriately in ULIP - Unit Linked Insurance Plan provides life cover. You should aim to provide financial security to your family with the help of ULIP plans.

4. Know how much you are charged in a ULIP plan - The premium paid is deducted for different purposes including various charges. Charges such as premium allocation charge, policy administration, mortality charges, portfolio management charges, etc. Each company may charge differently. It is therefore important to know how much charges are paid under a ULIP plan before buying the best unit linked insurance plan.

5. Know your lock-in period - All ULIP plans have a five year of lock-in period.

6. Know how long you want to stay invested - Unit linked insurance plans are long-term investment plans, however, you must ask yourself how long you wish to stay invested. Depending on the duration, you can shortlist from the various ULIP plans.

7. Check switching facility offered by ULP plan - Each unit linked insurance plan offers different switching facility. You must know switching facility options available in each ULIP plan before you purchase the best ULIP plan.

8. Compare ULIP plans- Choosing the best ULIP plan is easier with the help of comparing tool. Compare different unit linked insurance plans online.

Myths about Investing in ULIP

Myth: ULIP is not a good option for investment

Fact:

  1. Unit Linked Insurance Plan (ULIP), is a combo package of life insurance and investment
  2. Investment part is meant to help individuals to build funds over a period.
  3. You can invest as per your risk appetite. You can invest in large-cap funds, mid-cap funds, small-cap funds or a combination of any funds.
  4. However, ULIP is designed as a long-term investment product. If you have a horizon for 10 years or more, ULIP can provide great returns. ULIP is not meant for short-term-high-gains.

Myth 2: ULIP cannot be discontinued

Fact:

  1. As per the revised regulation by IRDA, the lock-in period has changed to 5 years after 2010.
  2. This favours investors with a high sum assured, and low initial charges, promising higher returns due to investment in funds.
  3. You can surrender ULIP after the lock-in period of 5 years. However, it is not suggested by the financial advisors to discontinue after lock-in period ends, as ULIP is designed keeping long-term investment in mind, i.e. with 15-20 years of the investment horizon.

Myth 3: There are many charges and the total money invested is far low in funds

Fact:

  1. Yes, there were many charges. The charges are loaded up-front with higher percentage bar.
  2. These loopholes in the earlier products limited the policyholder’s returns as it hindered the benefit of the investment. However, the revised products as per the IRDA guidelines help policyholders to reap the benefit of the investment.
  3. In the earlier scheme, almost 60-75% of the first-year premiums were allocated to charges in most of the cases. The recent changes ensure that these charges are uniformly divided over a period of five years (lock-in period). Consequentially, a good portion of the premium is invested right from the first year.
  4. Moreover, these fees or charges set by the IRDAI are the maximum that the insurance company can charge, so you must compare before buying ULIP to strike a cheaper and better deal.

Myth 4: ULIP is not a liquid instrument in case of an emergency

Fact:

  1. ULIP gives you a complete transparency of your investment. ULIP offers switching flexibility over a period of time. If your funds are not underperforming, you can switch. And invest where you expect to get higher returns.
  2. About liquidity in case of an emergency, you always have an option of partial withdrawal. However, partial withdrawals are allowed after the lock-in period ends. It costs you no fee or penalty. After a partial withdrawal, you still stay invested as per the policy tenure.

Myth 5: There is no opportunity for surplus investment in ULIP

Fact:

  1. ULIP allows you to invest any surplus amount (over and above the premiums paid) to gain returns
  2. You can invest with Top-up to increase life coverage and investment fund. Top-up is a one-time lump sum investment you can use during your policy tenure.
  3. Suppose, initially, you couldn’t invest more than the premium amount. If the policy tenure is 20 years, you can invest any time in between during the policy tenure.

Why should I buy ULIP from ‘Coverfox.com’?

We at Coverfox offer you a wide option of multiple insurance companies. You may compare the best insurance plan basis their features, benefits etc. and narrow down your search on the right plan as per your requirement. We offer you the claim settlement and worthiness of different insurers making it easier for you to zero down on the ‘best plan’ available. Because we are licensed with IRDAI, our advisors offer you the expert technical and trustworthy assistance. They would make you understand the know-hows of the product you choose to opt for and make insurance a little interesting, which otherwise sounds boring!. One of the greatest advantage of buying from ‘Coverfox.com’ is the spectacular after sales services. Our service managers assist you to make any changes in your existing policy and ease out the entire process. You would also be assured of timely reminders related to renewals and other insurance related services. Moreover, with such expertise, your claims are settled hassle-free with subsequent follow-ups with the insurance company. With these bunch of facilities coupled with, Coverfox.com should certainly become your first choice for insurance!

Frequently Asked Questions

What is the Maturity Benefit of a ULIP?

The amount of money which you will receive at the Maturity of your ULIP is called the Maturity Benefit of your policy. The Maturity benefit is calculated as the value of funds you choose to invest in.

How can I track my Fund Value?

To keep a track of your total Fund Value you need to know the Net Asset value of your funds. This NAV is determined everyday based on the market changes. Insurance companies publish an update for these values regularly.

If I am not happy with the returns, can I surrender my ULIP?

Yes, it is possible to surrender the policy by paying Surrender Charges after 5 years of lock-in period. But it is advisable to continue with the policy as in the initial years the policy may not yield higher returns due to Allocation Charges.

Can I borrow a loan against my ULIP?

Earlier it was possible to borrow loans against a Unit Linked Insurance Plan but according to new IRDA rule this is not an option anymore. Since ULIPs have an option of Partial Withdrawals, policyholders can withdraw some amount from their ULIP without asking for a loan.

How is the Death Benefit in ULIP calculated?

Based on the highest amount of Fund Value, Sum Assured or a Percentage of the paid premiums, the beneficiaries will be paid with the Death Benefit at the time of the policyholder's death.

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