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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.
Why invest in Ulip Plans

Twin Benefit

You get insurance + investment benefit. Returns are high as your money is invested in the stock market.

Financial Goals

Helps you achieve your financial goals such as education for your children and also money for your childrens marriage.

Rider Benefits

Riders give you lump sum amounts at critical times when you need money the most. They supplement your returns.

Tax Benefits

You get tax deductions on your salary, if you invest in a ulip. The amount you get at maturity is tax free.

Tax Benefits of a Ulip

You get a deduction under Section 80C of the Income tax act up to INR 1.5 Lakhs per year, on your taxable salary, for the premiums you pay for the Ulip. The maturity amount you get when the policy matures or the death benefit your family gets on your (policy holders) death, are tax free under Section 10(10D) of the income tax act.

Features Of Unit Linked Insurance Plan

Lock in

A Ulip has a compulsory lock in of 5 years. You cannot withdraw your money for this time. Invest in a Ulip only if you have a long term horizon (You must stay invested for five years and you need to be sure of what you are doing).

Switch

You can switch your investment from equity to debt or a balanced fund (debt + equity) and vice versa in Ulips. This must be done under the same plan.

Investment in equity and debt funds:

ULIPs offer a variety of investment options. You may choose to invest in equity, debt funds or even a combination of both.

Allocation and Expenses:

A ULIP attracts many charges and fees. A part of the ULIP premium goes towards mortality charges. This is charged for the insurance cover. The mortality charges are determined from a pre-defined mortality table. This table is based on the risk of death. The rest is invested in shares, bonds, and so on.

Lock-in period:

ULIPs have a lock-in period of 5 years. This forces you to stay invested for the long-term and enjoy compounding benefits.

Surrender of ULIP before 5 years:

You may choose to surrender the ULIP even before 5 years. However, the money is only paid, after the 5th year. Also, you will not get the fund value on the date of the surrender. The insurer will deduct Discontinuance Charges from the fund value and then move the balance to the Discontinued Policy (DP) fund. For the period when your funds lie in the DP fund, you may be charged a fund management charge (not more than 0.5% of the amount). Money in the DP fund will continue to earn interest at 4% per year.

Flexibility:

ULIPs offer you the option to switch from one fund to another. This is especially useful in case you want to alter your financial goals or risk-appetite.

Tax Benefits:

The premiums paid on ULIPs are eligible for tax deduction, subject to the overall limit of Rs 1.5 Lakhs under Section 80C. ULIP payouts are also exempt from Income Tax under Section 10 (10D).

If you wish to continue with the ULIP after the lock-in period, make sure it is less than 20% of the fund value. An amount exceeding this will attract tax liability and other charges.

Top-up facility:

You can invest windfall gains like a bonus in a ULIP as a top-up in addition to your premium. You can either choose to enhance your coverage and/or your investment.

Life cover:

You will have flexibility in selection of a life cover which is a part of the ULIP, depending on your financial capabilities.

Premium amount:

Almost all ULIPs offer policyholders an option to change the premium amount. Therefore, according to your ability to pay premiums, you can either increase or decrease it.

Riders:

Riders are additional benefits that enhance your life protection and coverage. These can be availed over and above the basic plan by paying a higher premium. You can opt for riders like critical illness rider, accidental death benefit rider and so on.

Transparency:

ULIPs offer illustrative brochures and free-look period. Hence, you can go ahead and avail a ULIP only if you are doubly sure of it.

Fees In Unit Linked Insurance Plans

ULIPs have many associated charges. It is better to know them before investing:

Fund management charges:

As the name suggests, this is charged for the management of the fund. It is calculated as a percentage of the value of assets. This fee is charged before arriving at the net asset value.

Discontinuation charges:

This fee is related with pre-mature withdrawal or discontinuation of the ULIP before the lock-in period.

Mortality charges:

These are charged on a monthly basis. These are charged to compensate a policyholder in case he meets with an unexpected demise.

Surrender charges:

Surrender charges are levied in case you choose to make either partial or full premature withdrawals of units.

Premium allocation charges:

This fee is charged to meet expenses incurred in issuing of policies like distributor fee and cost of underwriting of funds.

Policy administrative charges:

Policy administrative charges are charged towards the maintenance of ULIP policies which involves paperwork costs, premium intimation costs, and so on.

Fund switching charges:

Fund switching charges are charged if you want to switch from one fund to another fund.

Interest rate of Unit Linked Insurance Plans:

Rate of interest for ULIPs are expected to be between 10-12%.

 

Concepts & FAQ's ULIPS Regular Premium

What are ULIP's (Unit Linked Insurance Plan's)?

A ULIP is a life Insurance plan which provides a mixture of insurance and investment. ULIP's as an investment avenue are closest to mutual funds in terms of their structure and functioning. Profits are distributed to policyholders in the form of a bonus announced every year.

ULIP's = Insurance + Investment

In ULIPs, the investment risk is borne by the policy holder and hence returns are not guaranteed. The dynamics of the capital/stock market have a direct bearing on the performance of the ULIPs. Mostly insurance company offers a range of funds; the insured can direct the company to invest in the fund of his choice. Insurers usually offer three choices, an Equity (growth) fund, Balanced fund and a fund which invests in debt.

Tax benefits: ULIPs are eligible for Tax benefits under Section 80 C of the income tax act.

Advantages Of Unit Linked Insurance Plan

ULIPs combine the benefits of both life insurance and investments. Therefore, ULIPs have many inherent benefits.

  • Choose your own investment funds:
    Under ULIPs, you have an option of choosing your own mix of investment funds to invest, on the basis of your risk appetite. If you are an aggressive investor, you can opt to invest in funds having a higher equity ratio than debt. If you are a moderate risk-taker, you may choose to invest in balanced funds. If you are a risk-averse investor you may invest in funds having a higher debt ratio than equity.
    Also, you may switch from one fund to another as you proceed further in the term.
  • Top-up – allocate additional funds:
    ULIPs give you an option to allocate additional funds to your investment and insurance, as you wish. You pay such additional amounts as a top-up, over and above your premium.
  • Long-term investment:
    ULIPs are great investment options for achieving long-term goals like buying a house, car, retirement savings, and so on. ULIPs provide better returns over a longer period of time because of compounding benefits.
  • Tax Benefits:
    ULIP, being a life insurance product, provides tax benefits. You get tax benefits towards premiums paid under Section 80C. ULIP payouts are exempt under Section 10(10D) of the Income Tax Act, 1961.
  • Offers life cover:
    ULIP is a product offered by life insurance companies. As such, ULIP provides life cover to its subscribers. Moreover, it also gives you investment benefits.
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Frequently Asked Questions

What is the benefit payable on the maturity of the policy?

The value of the fund units with bonuses, if any is payable on maturity of the policy.

What should one verify before signing the proposal?

One has to verify the approved sales brochure for. All the charges deductible under the policy. Payment on premature surrender.Features and benefits. Limitations and exclusions. Lapsation and its consequences. Other disclosures

What are charges incurred in a ULIP?

Any ULIP has four major charges: Premium Allocation charges, Fund management charges, Policy Administration charges and mortality charges. Apart from these, there could be charges for switching, premium redirection, partial withdrawal, service requests etc depending on the life insurance plan.

Can one seek refund of premiums if not satisfied with the policy, after purchasing it?

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period).

Does ULIP offers guaranteed returns?

The returns are not guaranteed in a ULIP. ULIP is market linked and any risks associated with the ULIP are borne by policyholder.

How much of the premium is used to purchase units?

The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining, after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product and year to year. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units. Want to know more about the charges levied on Ulips? Then call us on 080 67974000

Is it possible to invest additional contribution above the regular premium?

Yes, one can invest additional contribution over and above the regular premiums as per their choice subject to the feature being available in the product. This facility is known as "TOP UP" facility. A part of the top up will be invested into the market while a small portion will be used to enhance the risk cover in the policy.

Whether one can switch the investment fund after taking a ULIP policy?

Yes. 'SWITCH' option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number.

Can a partial encashment/withdrawal be made?

Yes, Products may have the "Partial Withdrawal" option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of the units. To know more on ULIP plans, call us on 080 67974000

How is Surrender value calculated in Unit Linked Policies?

Surrender value in Unit Linked Policies is usually expressed as fund value less the surrender charge.

What is the method of arriving at NAV for surrenders, maturity claim, switch etc?

In respect of valid applications received (e.g. surrender, maturity claim, switch etc) up to 3.00 p.m. by the insurer, the same day's closing NAV is applicable. In respect of valid applications received (e.g. surrender, maturity claim, switch etc) after 3.00 p.m. by the insurer, the closing NAV of the next business day is applicable.

What is a Unit Fund?

The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policyholders are pooled together to form a Unit fund.

What is a Unit?

It is a component of the Fund in a Unit Linked Policy.

What Types of Funds do ULIP Offer?

Most insurers offer a wide range of funds to suit one's investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics.

  • Equity Funds : Primarily invested in company stocks with the general aim of capital appreciation.
  • 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 money market instruments.
  • Balanced Funds : Combining equity investment with fixed interest instruments.

Are Investment Returns Guaranteed in a ULIP?

Investment returns from ULIP may not be guaranteed." In unit linked products/policies, the investment risk in investment portfolio is borne by the policy holder". Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.

What are the Charges, fees and deductions in a ULIP?

ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise 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 normally includes initial and renewal expenses apart from commission expenses.
  • Mortality Charges : These are charges to provide 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 administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
  • Surrender Charges :A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.
  • Fund Switching Charge :Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.
  • Service Tax Deductions : Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

What should one verify before signing the proposal?

One has to verify the approved sales brochure for:

  • all the charges deductible under the policy
  • payment on premature surrender
  • features and benefits
  • limitations and exclusions
  • lapsation and its consequences
  • other disclosures
  • Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council.

How much of the premium is used to purchase units?

The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units.

Can one seek refund of premiums if not satisfied with the policy, after purchasing it?

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.

What is Net Asset Value (NAV)?

NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers.

What is the benefit payable in the event of risk occurring during the term of the policy?

The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the event of risk to the life assured during the term as per the policy conditions.

What is the benefit payable on the maturity of the policy?

The value of the fund units with bonuses, if any is payable on maturity of the policy.

Is it possible to invest additional contribution above the regular premium?

Yes, one can invest additional contribution over and above the regular premiums as per their choice subject to the feature being available in the product. This facility is known as "TOP UP" facility.

Can one switch the investment fund after taking a ULIP policy?

Yes. "SWITCH" option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number.

Can a partial encashment or withdrawal be made?

Yes, Products may have the "Partial Withdrawal" option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.

What happens if payment of premiums is discontinued?

a) 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 revival within the period allowed; if the policy is not revived 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.

b) Discontinuance after three years of commencement - At the end of the period allowed for revival, 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.

c) Policies having 5 year lock-in-period: For policies bought on or after 01-09-2010, lock in period has been increased to 5 years. Upon discontinuance of the payment of premium, the policyholder has the option of
(i) Reviving the policy or (ii) Complete withdrawal without any risk cover. A notice shall be sent by the insurer giving the above options, within 15 days from the date of expiry of grace period, if no option or option (ii) is exercised within 30 days of such notice, the proceeds of discontinued policy shall be refunded but not before the completion of the lock-in period. If such discontinuance is within lock in period, the policyholder shall have the right to revive the policy within a period of two years from the date of discontinuance but not later than the expiry of the lock-in period.

What information related to investments is provided by the Insurer to the policyholder?

The Insurers are obliged to send an annual report, covering the fund performance during previous financial year in relation to the economic scenario, market developments etc. which should include fund performance analysis, investment portfolio of the fund, investment strategies and risk control measures adopted.

 

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