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Types of Unit Linked Insurance Plans (ULIPs) Research Team | Posted On Thursday, December 02,2010, 10:22 AM

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Types of Unit Linked Insurance Plans (ULIPs)



Types of Unit Linked Insurance Plans (ULIPs)

What is Unit Linked Insurance Plan?

When we talk about Insurance as an investment option, ULIPs have an important role as many of the investor nowadays goes for this as a profitable avenue. ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides an arrangement of risk cover and investment. The dynamics of the capital market have a direct impact on the performance of the ULIPs. Remember that in a unit linked insurance plan, the investment risk is generally borne by the investor/ the holder of the policy.

Under this policy the insurer allocates the total premium into various units. You are also given the opportunity to choose the option of investment units. Most of the investors prefer to allocate them in financial instruments and assets. The number of units you choose on each option might differ from individual to individual. Some of you may choose to invest more on Real Estate while the rest prefer to invest more on financial instruments such as shares, debentures, etc.

Likewise the insurer takes care to allocate a unit of the premium for insurance maintenance and the related expenses. You are also excused from paying income tax for the profits received from the investment. However this policy does not guarantee profits like the traditional plans and is therefore risky as far as returns are concerned. But the possibility of making more profit is very high in this policy. 

ULIPs fundamentally work like a Mutual Funds with a life cover thrown in. They invest the premium in market-linked instruments like stocks, debentures, Corporate Bonds and Government Securities. Investments in ULIPs help to gain tax benefits under Section 80C.

Depending upon the performance of the unit linked funds chosen; the policy holder may realize gains or losses on his/her investments. It should also be noted that the past performance of a fund are not necessarily indicative of the future returns of the fund.

Types of ULIP Funds

Most insurers offer a wide variety of funds to suit your investment objectives, risk profile and time horizons. Different funds have different risk profiles. The possible for returns also varies from fund to fund. Following are some of the common types of funds accessible along with an indication of their risk uniqueness.

Nature if Investments
Risk category
Equity funds Primarily invested in company stocks with the general aim capital appreciation
Medium to High
Income, Fixed Interest and Bond Funds Invested in corporate bonds, government securities and other fixed income instruments
Cash Funds
Sometimes known as Money Market Funds invested in cash, bank deposits and moneymarket instruments
Balanced Funds
Combining equity investment with fixed interest instruments

ULIP Charges, fees and deductions 

ULIPs accessible by different insurers have varying charge structures. Generally the different types of fees and charges are given below. However it may be well-known that insurers have the right to modify fees and charges over a period of time.

Premium Allocation Charge

This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge usually includes initial and renewal expenses apart from commission expenses.

Mortality Charges

These are charges to offer for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc

Fund Management Fees

These are fees levied for management of the fund’s and are deducted before arriving at the Net Asset Value (NAV).

Policy Administration Charges

These are the fees for management of the plan and levied by cancellation of units. This could be flat during the policy term or vary at a pre-determined rate.

Surrender Charges

A surrender charge may be deducted for early partial or full encashment of units anywhere applicable as mentioned in the policy conditions.

Fund Switching Charge

Normally a limited number of fund switches may be permitted each year without charge with succeeding switches subject to a charge.

See Also: What are the Charges In a ULIP?

5 Steps To Select Right ULIP

We present a 5-step investment plans that will guide investors in the selection process and facilitate them to choose the right ULIP.

  • Understand the concept of ULIPs
  • Focus on your need and risk profile
  • Compare ULIP products from various insurance companies
  • Go for an experienced insurance advisor
  • Does your ULIP offer a minimum guarantee?

Understand the concept of ULIPs

Do as much homework as probable before investing in an ULIP. This way you will be fully attentive of what you are getting into and make an informed decision. More significantly, it will guarantee that you are not faced with any unpleasant surprises at a later stage. Our knowledge suggests that investors on most occasions fail to realise what they are getting into and unprincipled agents should get a lot of credit for the same. Collect information on ULIPs the variety of options available and understand their working. Read ULIP-related in order available on financial Web sites, newspapers and sales literature circulated by insurance companies. Our insuranceVertical will help you in finding one suitable product.

Know more about: tax planning

Focus on your need and risk profile

Identify a plan that is best suitable for you in terms of allocation of money between equity and debt instruments. Your risk appetiteshould be the deciding criterion in choosing the plan. As an effect if you have a high risk appetite, then an aggressive investment option with a higher equity constituent is likely to be more suited. Similarly your existing investment portfolio and the equity-debt allocation therein also require to be given due importance before selecting a plan. Opting for a plan that is unbalanced in favor ofequities only with the purpose of clocking attractive returns can and does spell disaster in most cases.

Compare ULIP products from various insurance companies

Compare products offered by various insurance companies on parameters like expenses, premium payments and performance among others. For example information on premium payments will help you get an improved picture of the minimum outlay since ULIPs work on premium payments as opposed to sum guaranteed in the case of conventional insurance products. Compare the ULIPs' performance i.e. find out how the debt, equity and balanced schemes are performing; also study the portfolios of various plans. Expenses are a significant factor in ULIPs; therefore an assessment on this limit is warranted as well.

Enquire about the top-up facility offered by ULIPs i.e. additional lump sum investments which can be made to enhance the policy's savings part. This option enables policyholders to increase the premium amounts thereby providing presenting an opportunity to usefully invest any surplus funds available. Our comparison tool will help you in finding the suitable plan.

Go for an experienced insurance advisor

Select an advisor who is not only familiar with the functioning of debt and equity markets, but also independent and unbiased. Ask for references of clients he has serviced earlier and cross-check his service standards. When your agent recommends a ULIP from a given company, put forth some product-related questions to test him and also ask him why the products from other insurers should not be considered. 

Insurance suggestion at all times must be unbiased and independent; also your agent must be eager to inform you about the pros and cons of buying an exacting plan. His job should not be controlled to doing paper work like filling forms and delivering receipts; instead he should keep track of your plan and offer you advice on a regular basis.

Does your ULIP offer a minimum guarantee?

In a market-linked product protecting the investment's downside can be an enormous advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. Select the product only if it is suitable for you.

Is investment in ULIPs a risky option?

ULIPs are also known as investment plans is an ideal package that comes with insurance coverage and investment options. So that leaves the customer with the opportunity of investing in equities. But they need to keep in mind that the investments in stocks are subject to the fluctuations of the market. The volatility in equity markets can keep the customer anxious and disturbed since they wouldn't like to see their reserve being affected. Customer need to know their risk taking capacity and then make a choice accordingly by choosing an appropriate fund.

As mentioned earlier; ULIPs offer the option to invest in anyone of the four funds. If customers are not tending to take a lot of risk then they can certainly invest in secured or balanced fund. However the best part of having an investment plan is that one can switchfrom one fund to another, which they find less risky. Two factors considered responsible for the introduction of ULIPs are firstly- the entry of private insurance companies in the insurance sector and the second factor being the decline of guaranteed returns on endowment plans.

Private players proved their innovative ideas with the introduction of ULIPs. The performance of these plans has also been quite impressive. The performance of stock market has made ULIPS all the more popular. It is the only option that lets one to be a part of the stock market and at the same time offers insurance coverage. It is like the better of two things merged into one and honestly things couldn't get any better when we bring its other features into the limelight.

An innovative aspect of ULIPs is the 'top-up' facility; a top-up is a one-time additional investment that is paid apart from the predetermined annual premium of the policy. This feature works well when customers have a surplus that they are looking to invest in a market-linked avenue. ULIPs also have the facility that allows the holder to skip premiums if they have paid their premiums regularly for the first three years. For example, if you have paid your premiums dutifully for the first three years then you have missed out the payment of fourth year's premium then the insurance company will make the necessary adjustments from your investment surplus and will ensure that the policy remains active. But it is always advisable to pay the premiums regularly to avoid difficulties. All these facilities are not available with any other policy. This makes it a differentiating factor when compared to policies like traditional endowment, term or money back policies.

Another important characteristic is that ULIPs disclose their portfolios regularly. This gives the customer an idea of how the money is being managed. Another important feature is its 'liquidity' factor. Since ULIP investments are NAV (Net Asset Value) -based it is possible to withdraw a portion of the investments before maturity. It is possible only after the completion of the lock-in period, usually it is three years. Such facility is not available with a traditional endowment policy. With ULIPs you can also take advantage of the tax benefits which is offered under Section 80C. It is subject to a maximum limit of Rs 1, 00,000. ULIP investment plans are mainly for those looking for security with an inclination for the share market.

Read the fine print before investing in ULIP

ULIPs have been a rage over the past year. Individuals have been buying ULIPs like they were going out of fashion. But do these individuals really know where their premium monies go?

Let’s begin first with what ULIPs can do for you. A ULIP, as the name suggests, is a market-linked insurance plan. The difference between a ULIP and other insurance plans is the way in which the premium money is invested. Premium from, say, an endowment plan, is invested primarily in risk-free instruments like government securities (G - secs) and AAA rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and G - Secs.

ULIPs offer a variety of options to the individual depending on his risk profile. For instance, an individual with an above-average risk appetite can choose a ULIP option that invests upto 60% of premium in equities. Likewise, an individual with a lower risk appetite can select a ULIP that invests upto 20% of premium in equities. While there are no two opinions on the flexibility that ULIPs afford to the individual, ULIP costs are another issue altogether. An example would make things clearer.

Suppose an individual, aged 30 wants to invest money in a ULIP from an insurance company, XYZ Ltd. The sum assured is Rs 200,000 and the tenure is 10 years. He has opted for 100% investment in equities i.e. he has opted for the aggressive growth fund option. The annual premium in this case works out to approximately Rs 19,000.

So it is very important to read the fine print of the ULIP before accepting it. Choose it only if all the features are suitable for you.

What happens if payment of premiums is discontinued?

Discontinuing premium payment can be of two kinds such as;

  • Discontinuance within three years of commencement
  • Discontinuance after three years of commencement

Discontinuance within three years of commencement

If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for renewal within the period allowed; if the policy is not renewed within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later.

Discontinuance after three years of commencement

In this case at the end of the period allowed for renewal, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount equivalent to one full year’s premium, the contract shall be terminated by paying the fund value.

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