What is a Unit Linked Insurance Plan?
A Unit Linked Insurance Plan is a twin benefit plan giving you
Insurance + Investment
You pay a premium and invest in a unit linked insurance plan. The Ulip gives you a life cover (your life is insured) and this cost is deducted from the premium you pay. The Ulip has other expenses and these are deducted from the premium you pay.
The remaining amount (Premium - charges), is invested in equity (mutual funds and shares), even up to 100% if you are an aggressive investor. (You are willing to take risks for a higher return).
If you are a conservative investor, your money is invested in debt (fixed income securities), even up to 100% where your money is more secure.
Your money can also be invested in a balance of debt and equity giving you a moderate return for a moderate risk called balanced fund. (50% debt : 50% equity).
How Does Unit Linked Insurance Plan Work?
A policyholder pays the premium on monthly or annual basis. A small portion of premiums are allocated towards various charges associated with ULIPs like administrative charges, mortality charges, premium allocation charges and so on. The insurer pools the remaining amounts and invests in equity, debt or hybrid funds, according to the type of mutual fund.
The total pool of money, i.e. the ‘corpus’ is divided into 'units'. Each policyholder is allocated ‘units’ in proportion to the amount that they have invested. The value of each unit is called the Net Asset Value (NAV). Any increase or decrease in value of the underlying asset is reflected in the NAV. ULIPs also allow you to switch between investments in debt and equity. This allows you to maximize gains when the market is doing great.
What Are The Types Of Unit Linked Insurance Plans?
The different types of Unit Linked Insurance Plans are
1.Funds that ULIPs invest in:
Equity Funds:
These ULIPs invest your money in equity. The risk associated with Equity funds are high because these have a higher ratio of equity compared to debt. Returns are expected to be high too.
Balanced funds:
These ULIPs strike a balance between debt funds and equity funds. This minimizes the risk and enhances the returns.
Debt Funds:
These ULIPs invest the corpus in debt instruments like bonds. The associated risk is lower; so, returns are low too.
2.End use of funds:
Retirement planning:
ULIPs are ideal for retirement planning. Retirement means no regular income. Once the ULIP matures, you can withdraw a lump sum from the accumulated amounts, after which you receive a fixed regular income for the rest of your life.
Children’s education:
ULIPs offer benefits for your children’s education. Funds are released at key educational milestones. This ensures that your children’s education is not impacted in case of financial emergencies.
Wealth creation:
ULIPs are meant for wealth creation.
Medical benefits:
These ULIPs provide financial assistance in medical emergencies. You can also opt for riders to protect yourself against major or critical illnesses.
3.Death benefit:
Type I ULIP:
In case of death of the policyholder, Type I ULIP plan pays higher of the sum assured or the fund value to the nominee.
Type II ULIP:
In case of death of the policyholder, Type II ULIP plan pays the sum assured plus the fund value to the nominee.
