ULIPS (Unit Linked Insurance Plans) is a product offered by life insurance companies which provide a combination of investment and insurance. This makes the product a goal protector on two counts- both by investing for a life goal when you survive the policy period or when you are no longer alive, benefitting your nominee.
Previously, Unit linked insurance plans had been subject to much bad press because they are expensive. However, the dedicated push by the Indian insurance regulatory authority, IRDA has helped in lowering charges substantially. For making ULIPs competitive in the market, particularly in comparison to ELSS (Equity Linked Savings Scheme), many insurance companies have launched fourth-generation ULIPS’s which have no policy administration or policy allocation charges. The charge for fund management is the same as that for ELSS.
How They Work
Because a ULIP plan has an investment component along with insurance coverage, part of the premium is used for life cover and expenses like fund management charges, while remaining is invested in debt, equity or hybrid (mix of both) based on the type of ULIP.
You can switch among funds in case you think that the fund has not been doing well. However, if you close your policy within 5 years, you will have to cough up Rs 6000 to the insurer as ULIPs come with a 5-year lock-in period.
After 5 years, you can withdraw funds partially or totally to foreclose your policy. But expert’s advice to stay invested for at least 10 to 15 years for earning attractive yields on your investment. Hence it is good to go for a ULIP if you have a long-term horizon to invest and are confident of paying premiums for the complete policy tenure.
Features of ULIPS:
- Death benefit: The minimum death benefit guaranteed by a ULIP is called as the sum assured. The insurer will provide value to the fund if it grows bigger than the sum assured. Some policies provide fund value along with sum assured. But such policies charge more premium.
- Maturity benefit: At the conclusion of the policy term, the life cover, which is the sum assured ceases to exist, and you will receive only the fund value as maturity benefits. When the policy matures, apart from lump sum pay-out, you will also have the option to select regular pay-out, like annually, monthly, half-yearly or quarterly.
Some insurers provide loyalty additions to the investor in case they are in the fund for a longer period of time- typically 10 years or more.
- Cost is vital: When you consider product structure and charges, ULIP seems to be costly. But in case of most 4G ULIPs, they have done away with such charges. The cost structure varies based on the insurer and kind of ULIP.
Charges on ULIPS
The standard charges and fees of ULIPS include:
- Premium Allocation Charge: A major chunk of premiums paid in initial years is counted as initial and renewal charges apart from the commission of agents. But many 4G ULIPs have got rid of such costs. You must check this before you purchase a ULIP.
- Mortality charges: This covers the cost of life insurance. It is based on age and sum assured and are deducted on a monthly basis. When your investment grows, the risk value comes down for the insurer and therefore, the mortality charge comes down gradually.
- Fund Management Charges (FMC): These are the charges which are charged by the insurer for managing funds in the ULIP. It is deducted before arriving at Net Asset Value (NAV) and is adjusted from NAV on a daily basis. The maximum FMC permitted is 1.35 % of the fund value, every year and is charged daily. As such, FMC’s of such new-age ULIPs match those of ELSS
- Charges for Policy Administration: These are charged on a monthly basis and levied for the administration of policy. Majority of new-age ULIPs do not charge this amount. So, ascertain from the insurer before purchasing a policy.
- Charges for fund switching: There is a limited number of free switches of funds available with insurers but a sum of Rs. 100 to Rs. 200 may be charged on subsequent switches.
- Charges for partial withdrawals: Certain plans provide unlimited partial withdrawals, while others have a limit of 2 to 4 times.
Riders to The Policy
With the clause of waiver of premium on the demise of the policyholder, he can ensure that the policy is used only for its long-term purpose. The future premiums are waived off and are paid by the insurer itself along with a lump sum payment at the time of death. Also, the total corpus built over the years is paid to the nominee when the policy period is over. This feature is valuable for persons who wish to keep their family financially secure in the event of their demise.
The rider for waiving of the premium is also applicable in the event of accident, critical illness or permanent disability. It ensures that all future premiums towards your ULIP policy will get waived and your life cover and investment will continue without hindrance.
Reasons to Invest in ULIPS
- Flexibility for fund options: Most ULIPs come with a range of options for debt, equity and balanced funds. You can invest as per your risk appetite and needs for finance. ULIPs also enable you to move your money across various funds for gaining maximum returns.
- The flexibility of Life Cover: ULIPs provide you with the flexibility to select your sum Assured at the start of your policy. Also, some ULIPs permit you to raise your sum Assured over the term of the plan to satisfy your protection needs at various stages of your life.
- Flexibility of Premiums: ULIPs also permit you to pay a top-up amount, over and above existing premium. This option can be used to maximize returns on investment.
- Flexibility of rider: Riders are optional features for customizing your ULIPs and gain additional protection. One common rider is a unit-linked rider for accident and disability benefits.
These are all some of the reasons why it is attractive to invest in ULIP insurance.