Unit Linked Insurance Plan (ULIP)

February 11, 2011   ·   0 Comments

 

 

Lesson 6: Unit Linked Insurance Plan

Unit Linked Insurance Plans or are contemporary life insurance policies that offer benefits along with life cover. It is similar to traditional life insurance policies such as endowment, money-back and whole-life, but with one major difference. Unlike traditional policies, in ULIPS risks are borne by policyholder and not with the insurance company.

 

ULIP came into play in the 1960s and is popular in many countries in the world. In India investments in ULIP are covered under Section 80C of IT Act. However, the concept of having an investment and insurance by the same instrument was challenged by the market regulator SEBI which took up the matter to the Supreme Court of India .The Indian government brought down curtains on the two-month long tussle between the regulators by ruling that Unit-linked Insurance Products (Ulips) will be governed by the Insurance Regulatory and Development Authority.

 1.      What are the different types of ULIP funds?

General Description Nature of Investment Risk Proximity
Equity Funds These funds are invested primarily in company stocks with the general aim of capital appreciation Medium to High
Income, Fixed Interest and Bond Funds These funds are invested in corporate bonds, government securities and other fixed income instruments Medium
Cash Funds Few know them as Money Market Funds – invested in cash, bank deposits and money market instruments Low
Balanced Funds These funds are invested in Equity + fixed interest instruments Medium

 

 

Another Classification of ULIPS can also be done as:

 Single Premium ULIP:  As name Suggests, you will need to pay premium only once. They have minimal Amount of Charges, fees & Deductions. Insurance Cover offered is very small. Single Premium ULIP generally starts with 30,000-40000 Rs, Range. Cheapest Available is Future Genralli Plan for 18,000 Rs.

 

 Regular Premium ULIP: This is the Regular Plans where there will be Deductions specially in the First Three Years & You will have to wait for You ULIP to break even with your Investment Amount. Insurance Cover provided is high as Compared to Single Premium ULIP’s. Regular Premium Plan gives you a much Braoder range of Premium Plan to Pick up.

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

ULIP charges differ with insurers. However the structure for charges and fees remains the same.

The different types of fees and charges are

 

Premium Allocation Charge

A percentage of the premium is pre-decided towards this charge and is levied before allocating the units. The premium allocation charge normally includes initial and renewal expenses apart from commission expenses.

 

 Mortality Charges

These are charges which decide the overall costing 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

A fee fund management charge is charged with regards to management of the fund(s) and is deducted before the allocation of units.

 

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 is applied on premature, partial or full encashment of units wherever applicable, as mentioned in the policy conditions.

 

Fund Switching Charge

A limited number of fund switches are allowed in a year beyond which is 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.

 

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3.     What should one verify before signing the proposal?

The approved sales brochure should be verified for the following 

    • 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% as prescribed by the life insurance council. 

 

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 4.     How much of the premium is used to purchase units?

Not the entire amount of premium paid is allocated for purchase of units. Insurers allot units on the portion of the premium pending after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product.

 

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

Yes, the policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy or is not satisfied with the policy, within 15 days of receipt of the policy document. The term is also called as the ?free look period?.

 

6.     What is Net Asset Value (NAV)?

NAV or Net Asset Value 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.

 

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

In the event of risk to the life assured during the term of the policy, the sum assured and/or value of the fund units is payable to the beneficiaries In such an event the value available to beneficiary is pre-mentioned in the policy conditions.

 

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

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

 

9. 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, provided the feature is available with the product. It is known as Top Up facility.

 

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

Yes switch option allows for shifting the investments in a policy from one fund to another provided the feature is available in the product. Switches are free of cost up to a specified number beyond which a switching fee is levied.

 

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11. Can a partial encashment/withdrawal be made?

Yes, Partial Withdrawal option is available with products which allow withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.

 

12.Should I Buy ULIP?

Well it totally depends on your Risk Profile. One Major thing which we like among ULIP is the ability to make Fund Switch. If you are well Averse with the Markets, then these Product can do wonders for you. You Can opt for Aggressive Equity Plans in the Down Markets & Opt for Debt Funds at High Levels for Safety.Not to Forget , there is Facility of Being Balance also in Equities & Debt Market according to your Choice.

 

Don’t take ULIP’s as Insurance Plan but Consider them as Investment Plans. As Insurance Cover provided by them is Ridiculuously Less to what it should be.

 

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We Suggest this Plan is most SUITABLE To those people who want to do Tax Saving & are at the Fag End of Year near March. Rather than Putting your Money in Closed Ended Mutual Fund in One Go, we ll recommend to Buy a Single Premium ULIP Plans. A Lot of People gets Caught in Mutual Funds at Higher End which this Product Can help to protect.

 

IRDA has bring lot of Regulation due to which lot of Charges have been demolished by IRDA for Regular Premium ULIP Plans. But Still taking Conservative View, If you are not Struck with your Tax Saving. There are still better ways to ACHIEVE your financial Goals which will be Covered in Coming Posts.

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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