All you should know about ULIPs

ULIP is an acronym for Unit Linked Insurance Plan. It is a life insurance policy that also provides investment in addition to the risk cover. Unlike whole life insurance policies where there are no returns or the ‘return risk combo’ policies where the returns are fixed, the returns provided by Unit Linked Schemes are totally dependent on the performance of Capital Market. So, a striking feature of the ULIP-program is that the risks are borne by the investors or the policyholders. Almost 50% of life insurance business constitutes of these hybrid ULIP programs.

To start with acquainting you about this unique scheme, here are the few basic questions and their answers:

What is a Unit Fund?

The policy holder provides an annual premium to the insurer. After deducting the expenses of risk cover, operational and administrative charges and maintenance costs, the money left from the premium is pooled together to form a Unit Fund. This allocated fund (known as Unit Fund) is then invested in various market instruments like bond and equity by the company.

What is a Unit?

The share of policyholders in this fund is divided in number of units.  The policyholder can decide whether they want to invest their portion in bonds, or stocks. They can also liquidate their units for the mortality charges in case of inability to pay premiums.

What are the various types of Funds offered by ULIPs ?

Depending on the risk taking ability of the policyholders, investment time period and objectives, insurers provide wide range of options to choose from which offer different risk and returns profiles.

• Equity Funds

With general aim of increasing the capitals, the money is invested in the equity stocks. The risk involved is medium to high.

• Income, Fixed Interests and Bond Funds

Invested is done in corporate bonds, government securities and other fixed income instruments. The risk involved is medium.

• Cash Funds

The funds allocated are invested in cash, bank deposits and money market instruments. The risk involved is low.

• Balanced Funds

It is the combination of above three investments, providing a balance between risks and returns.

Are investments returns guaranteed in United Linked Policies?

The returns on Unit Lined Schemes depend on the condition of capital market. These schemes never guarantee the returns like ‘with profit’ policies do. The investment risks on the portfolio are borne by the policy holder. Though they can choose a low risk low return investment portfolio.

One should also keep in mind that the past gains and returns on the funds are not indicative of the future performance of the portfolio.

Various Charges Involved in a ULIP Policy

• Premium Allocation Charge

These are the charges on the initial, renewal and commission expenses on the premium before the units are allocated for investments.

• Mortality Charges

These are cut for meeting the cost of life insurance coverage. It depends on the age and condition of the policy bearer.

• Fund Management Fees

It is the fees levied for management of the funds.

• Administration Charges

This can be fixed or vary between a pre-determined range. It is imposed for administration of plan and cancelling of units.

• Surrender Charges

Imposed for premature and partial/full encashment of units

• Fund Switching Charge
• Service Tax Deductions

Deducted from the risk portion of the premium

How much portion of premium is allocated to Unit Fund?

Finally, after deducting all charges and premium for risk cover, the remaining portion of the money is utilized to buy units.

What is NAV?

Net Asset Value is the value of each unit of the fund on the given day.

Flexibility Offered

• Switch

One can SWITCH between the various types of funds like Cash, Capital and Bond Investments

• Top-up

One can pay more amount than the premium to allocate more money to Unit Fund for investment purpose. There is also an option to pay premium by liquidating units at the time of inability to pay premium.

Nowadays, when everyone is trying to juice returns from every investment they make, ULIP policies can be a better option than vanilla life insurance plans which only provide covers.

In case of further query or doubts, post a question and do leave us a comment.

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