A ULIP is one of the most important kitties from every insurance company. ULIP is a plan that provides an individual bestowing the all-too-important risk coverage along with the freedom to explore the capital market for investments.
At those times when the mutual fund and the share market dominates investing individual's related portfolio, ULIP comes out as a savior. It was launched by the insurance companies to attract customers with a promise of high investments. However, nowadays ULIP has become very popular among many investors because of its providing dual benefit of insurance cover and wealth maximization.
What a ULIP Mean
Though ULIP is one of the most popular investment plans, it is worth mentioning that people often don't know what exactly it does, including people who even invest. ULIP is a product of insurance that offers risk coverage to the policy buyer along with introducing the buyer to investment opportunities in the capital market. We can say that it provides a platform for the buyer to invest in different types of investment instruments such as stocks, mutual funds as well as bonds. So, a ULIP can be classified as a two-in-one plan which aims at offering investment and protection to investors, which are customized according to individual requirements. Meanwhile, the investment and protection part can be managed according to specific buyer choices and needs, as it is a comprehensive plan.
Kinds of ULIP Plans
Classification by Purpose
- ULIP for retirement
- ULIP for wealth collection
- ULIP for children's education
- ULIP for health benefits
ULIP For Retirement
Under a ULIP for retirement, the premium is to be paid during the tenure of the investor’s employment only. The amount offered by the plan is used to purchase an annuity post the investor's retirement and automatically collected as his/her corpus.
ULIP For Wealth Collection
To accumulate wealth over some time, most people invest in this plan. A ULIP for wealth collection is one of the most highly recommended plans for the people in their late twenties and early thirties. This is because to ensure the flexibility to fund any future financial goal.ULIP for wealth collection. To accumulate wealth over some time, most people invest in this plan. A ULIP for wealth collection is one of the most highly recommended plans for the people in their late twenties and early thirties. This is because to ensure the flexibility to fund any future financial goal.
ULIP For Wealth Collection
To accumulate wealth over some time, most people invest in this plan. A ULIP for wealth collection is one of the most highly recommended plans for the people in their late twenties and early thirties. This is because to ensure the flexibility to fund any future financial goal.
ULIP for Children’s Education
One of the major investments in a person's life is his/her children's education. To make it a bit easier, some ULIP plans also support a child's education. These plans safeguard the investor’s child's future in any unforeseen situation by pooling in some chunk of money. The ULIP for children’s education ensures that the key events in your child's life never face a financial crisis.
ULIPs for Health Benefits
Adding one more in the queue, certain ULIP plans also assist in providing money in case of medical emergencies.
Classification by Death Benefit
- Types 1 ULIP Plans
- Types 2 ULIP Plans
Types 1 ULIP Plans
Here, the nominee gets the higher of Sum Assured or Fund Value as a death benefit to the nominee. However, the insurer pays the agreed sum to the assured's nominee, in case the assured dies in the initial years of the policy. This happens when the fund value is lower than the sum assured. But the death benefit is an increased amount in the fund when the fund's value is more than the sum assured.
Types 2 ULIP Plans
Under Type 2 ULIP plan, usually, the nominee of the policyholder gets the sum of both i.e. sum assured and fund value in the event of the demise of the policyholder. Meanwhile, the insurance company also charges extra for the added risk it assumes under the type II policy, from the policyholder.
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Funds to Invest Under a ULIP Plan
- Fixed Interest and Bond Funds: Such kinds of funds give returns on time. Generally. The insurance companies invest in debt funds, corporate bonds, government securities, etc. for fixed returns. The risk factor in these funds is comparatively higher than Cash Funds. It is a combination of secured and unsecured investments.
- Cash Funds: Considered to be the safest kind of investment, cash funds are the most popular. In the insurance sector, it is also known as money market funds through which the policyholder receives a set amount of returns upon maturity. Also, these funds fall in the low-risk category.
- Equity Funds: Equity funds initially invest in equities and stocks of companies. These funds are considered the riskiest ULIP investment, but interestingly they tend to offer the highest rewards. Hence, investors with a high risk-taking appetite should invest in an equity fund.
- Balanced Funds: Balanced funds vary the amount of investment that goes to different places, as it is one of the most stable and prudent investments. Insurers generally invest in a fixed component like corporate bonds and varied components like the stock market, with the money paid through premiums. Hence, balanced funds fall in the medium-risk category.
Benefits of ULIP
Flexibility: A ULIP plan offers flexibility in such ways:
- An investor is allowed to switch between funds and match his risk needs, under ULIP
- An investor is allowed to make partial withdrawals. But is worth mentioning that it may attract charges and is subject to certain terms and conditions, under ULIP
- An investor is allowed to make a single lump-sum addition to their premiums and increase their investments at any point of time, through the facility of top-ups, under ULIP
- Market-Linked Returns: More than six to seven types of investment funds to select between is offered by a ULIP plan to its investors. Interestingly, some of these funds are equity-based which offer good market-linked returns and increase the overall returns derived from a ULIP.
Investment With Life Protection: A ULIP plan offers the dual advantage of life cover along with investment. As a result, not only the investor is secured, but (s)he also has the option to gain higher returns and build wealth.
Funds for Crucial Milestones of Life: A ULIP can be bought for meeting the expenses arising out of important milestones in life such as marriage, college education, etc. because of its being an investment cum insurance plan with a long term investment horizon. Therefore, if somebody has a long term goal for himself/herself or his/her family, a ULIP is a beneficial investment plan.
Protecting Children’s Future: The ULIP will provide a guaranteed death benefit to the spouse and children if the investor, in case of an unforeseen event which leads to the demise of him/her. In such a way, the investor’s child’s future will not get affected in his/her absence.
Financial Security Post-Retirement: We have to agree that retirement is a crucial stage of every individual’s life. A ULIP scheme gathers enough corpus which can be utilized to live a stress-free life post-retirement, throughout the investment.
Transparent structure: one of the most important features of a ULIPs is that it allows its investors to keep track of his/her investment portfolio. Additionally, it intimates the investor about the percentage of premium that is invested along with the charges levied regularly. We suggest our readers be updated on the value and number of fund units that you hold.
Choose Your Investment Mix: Adding on more to the list of its benefits, one can decide the various fund options, based on the risk-taking appetite, when choosing a Unit Linked Insurance Plan. If any of the investors wish to gain higher returns and have the capacity to take higher risks for the same, (s)he can choose to invest in an equity fund. Hence, if (s)he wins, (s)he earns big. Also, if the investor wishes to take the lesser risk and are satisfied with medium to low returns, (S)he can choose to invest in a debt fund. ULIPs also provide hybrid funds that suit an individual investor's needs.
Rider options for additional coverage: ULIPs also provide rider options for additional coverage. This is done due to take care of your loved ones, along with investment benefits. The rider options like accidental death rider, critical illness rider, and term rider, the investor can rest assured that ULIPs not only take care of his/her insurance needs but are also beneficial for his/her family.
Tax benefits/deductions: As ULIPs are life insurance products, they offer tax benefits in the form of deductions of the premium amount up to Rs. 1.5 Lakh from one's taxable income and tax-free maturity or death benefit paid.
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Why Choose ULIPs
Regular Savings: A ULIP plan helps its investor in building a regular habit of savings as (s)he is required to submit the selected premium at regular intervals. Because the five years mandatory lock-in period prevents investors from withdrawing the money. Further, this feature helps to develop a huge corpus over the investment period.
Protection: Along with growing wealth, a ULIP plan also provides comprehensive life cover for the investor and his/her family. Just in case something happens to the investor in the future, his/her family receives the complete death benefit as per the payout option.
The Flexibility of Investment: Under a ULIP, the investor can choose between six to seven or more different fund options as per his/her risk appetite. (S)he also has the option to revise the investment portfolio and switch funds accordingly.
Tax Benefits: Premiums paid towards a ULIP scheme are eligible for deductions as per Sec 80(c) of the Income Tax Act, 1961. Also, the maturity or death benefit amount is tax-free as per Sec 10(10d).
Potential for Growth: If the markets they invest in reach new highs on every trading day, ULIPs have great growth potential.
Greater Rewards for Staying Invested: An investor’s portfolio can entitle his/her policy for booster additions because of staying invested in a ULIP for a long time. Throughout the investment, these additions are invested periodically and they add to the overall value of the fund.
Loyalty Additions: The policyholders are eligible for additional units on maintaining a consistent record of timely premium payments over a long time because of the Loyalty Units feature for ULIPs.
- Transparency: ULIPs offer complete transparency to the policyholder. (S)he is made aware of all the charges through the policy document. The investor is also told the different types of funds in which his/her money is invested and the number of units allocated on a timely basis.
- Liquidity: An investor can easily liquidate his/her ULIP scheme post the five years mandatory lock-in period via surrender option. The investor can also make partial withdrawals post the lock-in period.
- Low Surrender Charges: Within the initial five years if an investor plans to exit a ULIP, (s)he will be required to pay surrender charges. New generation ULIPs come with low surrender charges making it easier for investors to exit a fund in case of emergency, over the years.
- Customization: ULIPs are highly customizable plans. One can make switches within funds of his/her investment portfolio. (S)he can choose from several investment funds and revise the same in case the investor is not satisfied with the existing portfolio.
- ULIP Offers Life Cover: ULIPs provide life cove along with investment. Under a ULIP, the investor and his/her entire family are given life cover in case of a medical emergency.
- Dual Benefit: A Unit Linked Insurance Plan is an effective policy that offers the dual benefit of investment as well as life cover.
Types of ULIPs for Different Types of Investors
Investors Across Different Life Stages: ULIPs are good to go with all stages of life, no matters what is your age or marital status. Every individual can invest through ULIPs.
People at Varying Risk Types: An investor’s capacity for risk can determine the type of fund options under a ULIP scheme. If (s)he has a high appetite for risk, (s)he can switch to an equity-based investment fund that offers higher returns. The investor can invest in bond-based funds, for low-risk appetite. Anybody or any investor looking at moderate risk can invest in hybrid funds.
Hands-on Investors: A person doesn't need to be a hands-on investor for investing in ULIP. The professional investment strategy provided by the insurer can take care of the investment needs, in case an investor is new and (s)he does not know much about ULIPs.
People with Medium to Long Term Investment Horizon: ULIP is the best option for investors who are looking for options that have a medium to the long term investment horizon. Equity investment can provide the best returns among the various investment plans available when they are provided the required time.
How a ULIP Plan Works
As we all know, an investor pays the premium in a ULIP. Additionally, there are few investors as well who pay the premium and invest in the same portfolio. After this, the insurer pools this money, deduct the expenses and invests the balance money depending on the type of funds chosen. Such funds can be invested in either equity, debt or balanced funds. Further, with a certain face value, this total corpus is divided into units. The proportion to the invested money, the insurer allocates 'Units' to each investor. This unit's value is termed as 'NAV' or Net Asset Value. All insurers have a fund manager to keep a track of the invested funds.
The units NAV either increase or decrease, resulting in a higher or a lower NAV, which is based on market performance. 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.
How to Choose The Best ULIP
- Depending on the Insurance Objective: Most Unit Linked Insurance Plans are long term and hence have a lock-in period. Therefore, before investment, an investor must ask himself/herself how long does (s)he wants his/her money to be invested in a policy? Based on the duration, the investor can choose from several ULIP plans. Once invested, all ULIP plans have a five year lock-in period.
- Fund Variety/Returns: ULIPs also allows its investors to choose the investment options before (s)he selects a plan. Based on the risk-bearing capacity of the investor, a buyer can choose to invest in equity, debt or a hybrid plan respectively.
- Based on Personal Investment Goals: Before an investor wishes to invest in a ULIP, it is imperative to define his/her long term financial goals. His/her long term goals should align with the ULIP investment more than anything, so that (s)he invests in the correct kind of plan.
- Comparing ULIP Offerings: A comparing tool helps in makes choosing the best ULIP plan. It is suggested to use such platforms to compare different unit-linked insurance plans online.
- Keep a Track of The Charges in the ULIP: Policy administrative charges are the basics of all investment plans. The charges are levied as a fee for managing an investor’s policy. It is advised to make sure that the charges are minimum.
- The Longer, the Better Term Investment: The best possibility of returns from a ULIP plan comes by staying invested for a longer duration. Earning compounding returns from the growing markets is possible through a longer duration of investment in equity investments.
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What ULIP NAV Means
By NAV, we mean Net Asset Value. The NAV is the price per unit of a ULIP scheme. In the cases where an investor pays a premium for a ULIP scheme, (s)he is buying individual units of that particular scheme. The Net Asset Value means the price per unit of a ULIP.
The Lock-in Period and Charges of ULIP
A mandatory lock-in period of five years is what a ULIP plan comes with. The investor can only withdraw from a ULIP post the five years.
Here is a list of various charges levied as a fee under a ULIP scheme:
- Fund management charges
- Policy administrative charges
- Premium allocation charges
- Surrender charges
- Morality charges
- Fund switching charges
- Discontinuance charges
Types of ULIP Riders
Here’s a list of various types of riders offered by ULIPs:
Accidental Death and Permanent Disability Benefit Rider: Unfortunately, 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. This rider is basically to provide supplementary coverage to the life assured’s loved ones. But, an accident may not necessarily result in the death of the victim, but leave the victim permanently disabled due to the loss of hands, legs, or both. This may result in a victim being a handicap or cripple. As a result of this, the life assured won’t be able to work, earn money and pay the premium. The life assured with an accidental total and permanent disability rider gets the rider cover, in cases like this.
Critical Illness Rider: Some of the critical illnesses sometimes act fatal and leave the sufferers unable to work, such as cancer, heart attack, kidney failure, coronary artery bypass, paralysis, etc. Additionally, with this, the treatment of such an illness is too expensive to handle. With a critical illness rider on the side, all these expenses are 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.
Term Rider: Unfortunately, in case of death of the life assured during the term of the policy, this type of rider offers a lump sum or monthly income to the nominee of the life assured. This is especially beneficial when the life assured was the only bread earner of the family. Term rider gives a stipulated amount every month to ensure that the assured’s loved ones are taken care of and monthly inflow of income continues to support everyday needs.
Waiver of Premium: Anybody’s earning potential is hampered, and income comes to a standstill in case a death, accidental permanent disability or critical illness happens. As a result, the bread earner is incapable of paying premiums for the rest of the term. If the investor stops paying the premium, his/her 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, his/her premiums are waived off in the event of disability or critical illness during the term of the premium. However, the policy continues with all benefits intact.
Things to Remember Before Investing in a ULIP Plan
- The investor should know how a ULIP functions.
- The investor should know his/her investment goals, risk appetite, and current financial health.
- The investor should be knowing about exit load charges or fees.
- The investor should have an idea of the past performance of the fund.
- The investor should compare multiple ULIPs before taking the final call.
Eligibility Criteria for ULIPs
- The entry age criteria must match whatever is mentioned in the policy wording before purchase
- The maximum age allowed under a ULIP plan must not be exceeded. To exit, the investor must be below the maximum age mentioned in the ULIP plan.
Required Documents to Purchase a ULIP
- Income proof - Salary slips, income tax returns, bank statements, etc.
- Address proof – Driving 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.
Myths and Facts About ULIP Plans
Myth 1: A unit-linked insurance plan is not good for investment.
Fact: Experts consider ULIP as an excellent option for investment. Under ULIP, not only are the investor gets life cover for himself/herself and his/her family, but also an opportunity to earn high returns and build wealth. Also, the investor has the option to switch funds in case they are not performing well.
Myth 2: A unit-linked insurance plan usually has a high cost.
Fact: This statement was correct during the early generation of ULIPs which were released during the initial years of ULIP schemes. This is no longer true as new generation ULIPs are relatively cheap and the cost is evenly distributed over the lock-in periods. According to the experts in the field, the investor has the flexibility to select premium payment terms and modes.
Myth 3: Because of offering market-linked returns, ULIPs are risky instruments.
Fact: We all know that all funds which offer market-linked returns are bound to carry some risk. But ULIP provides this opportunity to its investor that (s)he can select the type of investment funds and revise his/her portfolio according to his/her preference. This results in a reduction in the risk arising out of market volatility.
Myth 4: In case of an emergency, ULIP is not a liquid instrument.
Fact: ULIP offers complete liquidity post the five years mandatory lock-in period. The investor can surrender the entire policy and receive the invested amount.
Myth 5: A unit-linked insurance plan does not provide good returns.
Fact: ULIPs provide excellent returns, certain plans even provide higher returns than a mutual fund. Any investor can always select the fund portfolio as per his/her risk appetite.
Myth 6: It does not allow for the investment of surplus funds.
Fact: As a matter of fact, all ULIP plans come with booster additions which add to the sum assured corpus. Over the tenure of the investment horizon, such additions happen.
Myth 7: A unit-linked insurance plan does not allow discontinuation.
Fact: All ULIP schemes can be discontinued any time but the payout is made the only post the completion of five years mandatory lock-in period. In addition to this, the investor also has an option to revive a previous lapsed policy.
Myth 8: A unit-linked insurance plan covers decreases with market volatility.
Fact: The life cover under a ULIP plan varies from policy to policy and the insurance service provider. It has got nothing to do with market volatility as the sum assured is guaranteed.
To Sum Up
By all means, we can say that despite being one of the most confusing terms for a policyholder or investor, ULIP works as a savior of their bad times. Because of its providing dual benefit of insurance cover and wealth maximization, it is one of the most important kitties from every insurance company. We, PolicyX suggest our readers' survey, read well and take an expert's views before investing in a unit-linked insurance plan so that they can choose the best suitable plan for themselves.
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