Unit-linked Insurance Plans or ULIPs are marked linked plans which dynamically offer insurance and investment. Its insurance with dynamic investment option as it is linked with market funds also gives option between choosing from equity, debt, balanced funds based on one’s risk appetite. Be it Wealth creation, planning for children education/marriage or securing your post retirement years, ULIP variants are available.
ULIP has traveled long way since its first launched in 2005 at India. When it started charges where little on higher side, however second generation ULIPs are much cheaper charges are as low as 1.35%* in few available ULIPs in market. IRDA in 2010 has also capped the aggregate charges at 2.25%. Few ULIPs are cheaper than mutual funds and they come with life cover too. In the recent news few insurance companies have launched ULIPs with life cover with no mortality charge that is life cover is given to insured without any charges.
Functioning for ULIP
Premiums paid are invested in equity, debt, balanced funds chosen by you. Charges are applied for allocation, fund management, mortality etc. Value of each fund is calculated units called as NAVs – net asset value.
The net asset value (NAV) of a unit-linked insurance plan (ULIP) is the total value of its holdings net of admissible expenses. NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the insurer website. You may also view the same under your ULIP account given to you by insurer.
Types of charges in ULIPs
1. Premium allocation charge
2. Policy administration charge
3. Surrender charges
4. Mortality charges
5. Fund management charges
6. Fund discontinuation charge
7. Fund switching charge
Your insurer might charge all or few of the above charges, please check with insurer while purchase.
Types of ULIPs
Type 1 - At death insured receives death benefit which is equal to higher of sum assured or fund value.
Type 2 - At death insured receives death benefit which is equal to higher than sum assured and fund value. Premium is higher in type 2 ULIP than type 1 ULIP.
Varieties of ULIPs
ULIPs are classified into different variety based on the usage or goal they serve.
1. Retirement ULIP
2. Wealth creation ULIP
3. Child plan ULIP
4. Health benefits ULIP
Why ULIPs are considered to be the most preferred investment option these days:
• For being transparent
• For allowing customization
• Fit to all your requirements
• For providing Life cover While creating wealth
• Tax Benefits
How do ULIPs function?
• Decide the amount of premium to be paid and the amount of life cover you require.
• Some portion of the premium is deducted by the insurer upfront as premium allocation charges.
• The rest of the premium amount is invested in the funds chosen by the insured.
• Other charges such as admin and mortality charges are deducted on periodic intervals (mostly monthly).
• Fund management charges are deducted on a daily basis.
• At maturity, you will receive the fund value as at the time of maturity.
Charges incurred in ULIPs:
• Premium allocation charges.
• Administration charges.
• Mortality Charges.
• FUND Management Charges (FMC).
How to choose our best ULIP plan to gain maximum benefit:
• Understand your requirement.
• Know your risk appetite (For e.g. If you’ve a high risk appetite, choose for a fund which is more aggressive and invests higher percentage in equities).
• Understand the charges levied on your plan as charges varied from product to product.
• Compare the past performance of your chosen plan, ensure that you’ve an easy access to your NAV whenever needed.
• Compare the products of different insurance companies to have maximum benefit out of your investments.
Things to keep in mind while opting for a Unit-linked Insurance Plan:
• Choose an appropriate life cover wisely keeping your needs and liabilities in mind, your sum assured should be sufficient to take care of all your liabilities in longer term.
• It provides you with desirable results only when bought for longer durations as the product charges are higher in the first few years.
• Choose your fund options carefully keeping your risk appetite in mind.
• Never forget to educate yourself about the charges incurred in ULIPs.
• Check for the switching option carefully knowing the number of free switches etc. throughout the policy term.
*NAV is the value of each unit of the fund on a given day.