ULIP – United Linked Insurance Plan
What is ULIP?
ULIP is united linked insurance plan, a life insurance product, which gives risk coverage to the policy holders along with investment options in number of qualified endeavours, for instance, stocks, securities or mutual funds. Being a single un-segregated plan, the protection and the investment part can be managed by the policy holder as per their requirement.
Introduction
In United linked insurance plan the investments made are liable to risk related with the capital markets. This investment risks are borne by the policy holder. Thus a policy holder should invest after subsequent consideration of risk and needs.
Another component that a policy holder should consider is their future requirement for funds. There are various kind of ULIP plans available in the market and a customer should select according to their need in future.
How is ULIP different from other products?
A short comparison of ULIP to other products available in the market
The Other products available in the market are as follow:
- Term insurance
- Endowment plan
- Whole life policy
- Money back policy
- Mutual funds
Term Insurance – They are the basic form of life insurance plan, providing life cover with no savings. Their premiums are cheaper compared to other insurance. This insurance provides pure risk cover, and hence an assured amount of money is paid to the beneficiaries if the policy holder dies before the term of the policy is exhausted. If the policy holder survives there is no pay out for that.
Endowment plan – This plan differs from term plan only in one aspect, the endowment plan makes a pay out in case of death of policy holder as well as in case of the maturity of the plan term. Hence the premium of this plan is comparatively higher than that of term insurance.
Whole life policy – This policy covers a policy holder over his entire life. Since the term of the policy is not defined the policy holder enjoys coverage his entire life by paying premium for the same till their death, after which the money is paid of to the family members. Since there is no pre-defined term for this policy it expires only with the death of the policy holder.
Money back policy – This policy is an alternative of endowment policy. This policy makes periodic payment over the term period. A portion of the assured sum of money is paid out at regular intervals. If the policy holder survives he is paid out the balanced sum of money. In case of death the beneficiary get the assured money.
Mutual Funds – This are pure investment without any guaranteed return.
Whereas ULIP is an alternative to traditional endowment plan paying out sum assured or investment amount whichever is higher, on death or maturity whichever is earlier. However ULIP differs in certain areas compared to endowment policy. The ULIP policy performance is directly linked to market as suggested in the name itself. Further policy holder can choose the allotment of investments in stocks or debentures of market. The value of these investment valises is capture by net asset value or “NAV”. This brings to fore face ULIP and mutual fund are almost identical with only one difference ULIP is a combination of insurance and investment, whereas mutual funds are pure investment only.
Advantages of ULIP
In ULIP premium paid by policy holder are invested in funds selected by the policy holder, after deduction of allocation, managing, policy administration charges and insurance cover. Since the ULIP is structured this way there are certain advantages borne with this structure they are:
- Market linked returns
- Life protection investment and savings
- Flexibility
Market linked returns
ULIP provides opportunity to earn market linked returns as premiums are invested in market funds like debt and equity.
Life protection investment and savings
ULIP provides double benefits of insurance and savings at market linked return. Thus policy holders have opportunity to earn higher returns besides taking care of their protection need.
Flexibility
Option to switch between investment fund as per need of the policy holder.
Facility for partial withdrawal from fund on behalf of charges is also allowed.
Enabling policy holder to invest additional money over premium as and when desired, subjected to conditions.
Servicing A ULIP
Servicing a Unit linked plan are done on basis of single premium, regular premium, total number of premium paying year.
Single Premium
In this case the entire premium amount is paid at the beginning of the policy term.
Regular Premium – {annually, semi annually or monthly}
In this case the policy holder pay the pre-decided premium sum intermittently i.e. yearly, semi annually or month to month, based on the premium instalment term decided on.
Number of premium paying years
It is based on the policy term that the policy holder has opted for. In most cases both the term and the premium paying years are same. However some policy provides the insured the flexibility to select the number of premium paying years.
Charges Involved with ULIP
The charges that incur with buying an Unit linked insurance plan are as follow:
Administration Charges – A fee charged for administration of policy every month. The charges are deducted by cancelling units proportionately from each funds selected by the policy holder.
Fund Management Charges – This is charged as expenses incurred in order to manage fund. This is charged at fund value and is subtracted before the arrival of net asset value of the fund.
Switch Charges – These are the charges are applied when a policy holder switch between funds as per their need. However an allotted number of switches are available free of cost in a calender year, beyond which the switch charges are applicable. The charges are deducted by cancelling units proportionately from each funds selected by the policy holder.
Surrender Charges – These charges are applicable on pre-encashment of units. They are charged on percentage basis of fund value and the policy year of encashment.
Mortality Charges – Based on the age and the amount of cover, these charges are taken for providing death cover to the insured.
Premium Allocation Charges – These charges are levied as fixed percentage on the premium received however the rates are higher during the initial policy year. Charges however vary based on premium plan, size, frequency and mode of payment.
Partial Withdrawal Charges – Withdrawal of huge amount are allowed from fund when the policy is lapsed for 3 year or more based on pre-mentioned conditions. These withdrawals are charged as mentioned in policy brochure.
Having known the different focal points that ULIP offers, it is advisable to pick the correct unit linked insurance plan relying upon ones age and the relative objectives at different life stages.
