Unit Linked Insurance Plan is just like any other returns plus cover insurance policy with few technical differences. One of the main attributes that distinguishes ULIPs from normal insurance is that the cash value of the policy varies according to the current net asset value of the underlying investment assets. The main advantage of Unit Linked Insurance Policies is that it provides both protection and flexibility in the investment. This feature is absent from the normal ‘whole life policies’.
One can call ULIP-plans as a hybrid between Life Insurance Policy and Mutual Fund. It provides protection of the former and the flexibility of the latter. The money collected in these plans is invested in equity. ULIP-policies account for around 50% of life insurance business. These Unit Linked Insurance Products are regulated by Insurance Regulatory and Development Authority (IRDA). A lot of debate went into who will regulate this hybrid type of plan, and finally IRDA was favored in place of stock holding watchdog SEBI. SEBI has disapproved many of the Unit Linked Policy launches which have got approval from IRDA. This long tussle has now been resolved after the president of India signed a document on June 18, 2010 making IRDA the only regulator for Unit Linked Insurance Plan.
Often people, misjudge these Unit Linked insurance Plans with the more common ‘with profit’ or ‘cover plus returns’ policies. The latter also provide monetary benefits along with the life insurance cover but they have different structure altogether. The profit in these is distributed to policy holders in form of bonus announced every year. Annually, the authority calculates the amount to be paid for maturity claims, mortality charges, processing and administrative expenses. The rest of the money left after meeting all the liabilities is credited into the policy holders’ account as surplus bonus.
In ULIP’s program also, the insurer deducts various expenses and charges like life claims, maturity and management expenditure. But unlike ‘with profit’ insurance, in this the rest of fund is used in investment in stocks and bonds. The share of policyholders in this investment is shown and divided in terms of no. of units, and that is why it is called a ‘Unit Linked’ type of Insurance Plan.
In most of the cases, the insurance holders can choose from the variety of options offered by the insurance company like:
- An equity (growth) fund
- Balanced fund
- A fund which invests in bonds only.
So, a lot of independence is given to the policyholder about where his money should be invested. They can decide whether they want to go for the high risk high return equity investment, or they want to go for bonds or they want a balanced portfolio. All these liberations are given along with the life insurance cover making this saving cum security plan an attractive option.
Unlike the traditional life insurance plans where the investment portfolio is undisclosed just like a black box, the ULIPs stands a notch higher with policyholders being aware about exactly where their money is going. They even have a choice to opt for a certain type of investment. This transparency provided by these plans definitely leaves the policy holder in a much informed state. Moreover, if someone is not able to pay his or her premium he can liquidate some of his ‘Units’ in the plan to meet the life cover or morality charges.
In technical structure, ULIP-funds are nearest to Mutual Funds. But, when it comes to choosing between the two, former stands as a good option for a long term (over 10 years) investment. Mutual Funds are a better option for a shorter 5 year period. Most of the Insurance Houses, love this crossbreed ULIP scheme as the risk is shared between the insurer and the policy holder unlike other schemes.
At the end of the day, the best insurance plan is unique for every person, but these unit linked schemes do pose a great alternative. Leave your comment or post a question to know more about ULIP plan and which plan will suit you the most.
July 18, 2011 at 3:51 pm
Good information provided, this will help me a lot.