ULIP Unit Linked Insurance Plans

ULIP stands for 'unit-linked insurance plan.' It is a popular investment cum insurance instrument across the globe. ULIP is a handy financial instrument that offers customers the best of both the investment and the insurance worlds. Insurance companies provide these plans to customers who wish to purchase insurance as well as grow their money alongside. ULIPs offer insurance coverage to the customers and simultaneously allow them to capitalize on various investment instruments like stocks, bonds and mutual funds. The combined benefit of protection and the freedom to choose an investment avenue makes ULIPs one of the most popular financial tools among customers.

Key Features of ULIPs

ULIPs provide investors with numerous benefits through features like:

Flexibility: Investors are allowed the option of switching between funds in ULIPs. Hence, investors can choose to channelize their investments in the financial instrument of their choice after assessing the market conditions. Depending on their financial capabilities, customers can choose the life cover in the insurance part of ULIPs. Customers get the facility of changing their premium amount after a certain period. They can also top-up their policies to maximize their gains during conducive market conditions. A wide variety of add-on benefits called "riders," are available with most ULIPs. These riders are designed for enhanced protection. Moreover, customers get to choose which type of fund should their money be invested in.

Risk mitigation: Since investors can pick and choose their investments, they can select a fund according to their risk appetite. The fund options range from conservative to aggressive variants to cater to the preference of almost all types of customers. Risk-averse customers can choose to invest in more secure tools like debt funds and risk-takers can opt for equity funds. These policies are good for customers who are looking to benefit from the market growth without directly participating in the stock market.

Tax benefits: ULIPs are life insurance products and hence offer tax benefits in the form of tax-free maturity. However, it largely depends on the type of the ULIP. ULIP investments in equity funds can be taxed under certain conditions.

Low charges: The annual charge on ULIPs have been capped at 2 to 2.5% for the first 10 years by the IRDA. These charges are quite low and are at par with the charges for mutual funds.

Long-term investment: ULIPs can be excellent long-term investments as a long lock-in period which also reaps higher returns.

Transparency: ULIPs, quite unlike other investment tools, allows the customers to control their policies to a large extent. The companies clearly state the benefits and features, provide illustrative brochures and free-look periods make sure that the customers are completely certain before investing in the ULIP schemes.

Liquidity: Most ULIP schemes offer a lock-in period of 3 to 5 years, after which customers can withdraw the money completely or partially.

Multiple Benefits: ULIPs provide insurance benefit as well as opportunities to grow the money through investment in various financial instruments.

How Do ULIPs Work?

Unit Linked Insurance Plans provide risk cover along with investment options for the policyholder by permitting the policyholder to invest in shares, bonds or mutual funds. The policyholder has the liberty to choose the investment type too.

Initially, ULIPs were primarily positioned as a long-term wealth generation products and they did not assure returns either. However, almost all ULIPs nowadays offer assured returns to the investors, sometimes as good as the double or more of their initial investment.

ULIPs let the policyholder invest in a variety of options. The policyholders get to decide whether they wish to invest in low-risk financial products or the high-risk ones. Some of these policies allow the policyholder to rearrange their investments in order to maximize their gains when market conditions are conducive.

As policyholders invest in ULIPs, half of that amount is invested in equity markets by the insurance company and the other half is kept aside for providing life insurance. Fund managers of the insurance company handle these investments, and thus the policyholders need not track the investments.

Death and Maturity Benefits

ULIPS offer death and maturity benefits that are central to any ULIP policy, irrespective of the insurance company or provider offering the scheme. Death benefits are applicable to cases of unfortunate demise of the policyholder. Generally, the death benefit comprises the sum assured and fund value added to it. However, the benefits may vary depending upon the cause of death. Maturity Benefits are offered when the policyholder survives till the maturity date. It generally comprises the amount of fund value. However, certain companies may offer some extra benefits as per the policy terms and conditions. The death and maturity benefits may slightly differ from one company to another.

Types of Funds that ULIPs Offer

ULIP policyholders can choose from a wide range of fund options to invest in, ranging from low-risk to high-risk funds. These are the different types of funds offered by ULIPs:

Cash funds: Cash funds or money market funds are mutual funds that are safe and easily accessible. These are generally low-risk funds promising low returns.

Balanced funds: These are a combination of equity and fixed interest instruments. They maintain a balance of shares and bonds to guarantee positive returns as the bonds offset the potential risks of equity investments. These are categorized as medium-risk investments.

Income, fixed interest and bond funds: These are generally invested in debt funds, government securities, corporate bonds and allied fixed income instruments. They offer a mix of secured and unsecured investments. Thus, policyholders have to be willing to take an elevated risk for a moderate percentage in terms of returns.

Equity funds: These are invested in company stocks to generate capital appreciation. These are high-risk investments.

Choosing a ULIP

Just like all other insurance products, the market is flooded with numerous types of ULIPs offering different investment opportunities. While choosing ULIPs, customers must consider several factors to maximize their returns while staying within their risk appetite:

• Select the ULIP that helps to meet your personal investment goals. Your financial goals may be funding a child’s education or planning for your retirement or building a corpus of funds or something else. With your financial goal as the basis, select the type of ULIP scheme that can help in achieving that goal.

• Once you have chosen the type of ULIP to fulfill your financial goal, compare the ULIPs available in the market. Focus on the expenses, the premium amount, the payment flexibility and the performance. Closely study the mix of shares, bonds and equities that the ULIP invests in. It will help in getting a broad picture of the security of the scheme and returns possible from it

• Go for a policy that offers flexibility in terms of benefits and duration.

• Look for ULIPs that provide a flexibility for investments, ranging from bonds to stocks to equities. Such a flexible investment guarantees higher returns as it permits high-risk investments when the market is favorable, even if the initial investment was a low-risk one.

ULIP Eligibility Criteria

These are the eligibility criteria for ULIPs:

• A potential policyholder should meet both the upper and lower age limit criteria as set by the insurer and as required for the policy type.

• A potential policyholder must prove his/her ability to make the premium payments as per the chosen policy.

Key Terms in ULIPs

• Policy Term: It is the period of coverage offered by an insurance policy.

• Premium Payment Term: It is the term for which the customers are required to pay the premium. For example, if someone purchases a life insurance ULIP for 10 years with annual premiums payable for seven years, then the premium payment term is seven years.

• Premium Payment Mode: It is the mode used for making the premium payment for insurance schemes. The online mode is most common these days.

• Partial withdrawals: It is the act of withdrawing a part of the invested money after a certain time has elapsed.

• Sum assured: It is the amount of money that the policyholder is sure to receive at maturity.

• Fund Value: It is the total value of the funds that a policyholder holds at any point in time.

• Death Benefit: It is the total amount paid out to policyholder’s beneficiary or nominee in the unfortunate circumstance of his/her death.

• Maturity Benefit: It is the amount paid out to the policyholder at maturity when the policy term is over.

• Loyalty additions: It refers to the perks or extra amount added by the insurance provider to a policyholder’s account as a token of steady insurance relationship.

• Free-look period: It refers to a 15 or 30 day period given to customers to understand the terms and benefits of ULIPs. Customers are allowed to return the policy within this time period in case they are not satisfied with the ULIP's terms and benefits.

Types of ULIPs

ULIPs can be classified into various types, based upon several parameters

Categories based on funds that ULIPs invest in:

ULIPs can be categorized into three types based on the type of fund it invests in-

• Equity Funds - schemes that invest a part of the premium paid by the policyholder in equity funds. These funds have a high-risk ratio due to the active linkage to the stock market.

• Balanced funds - as the name suggests, these schemes strive to strike a balance between stock market investments and debt funds to minimize risk for customers and increase returns.

• Debt Funds - schemes that invest the customers’ money in low-risk debt instruments like bonds, where the returns are low.

Categories based on the end use of funds:

ULIPs can be categorized into four types based on the end use funds-

• For retirement planning - schemes meant for customers looking to plan their retirement earnings through the payment of premiums while they are employed.

• For child's education - schemes meant for supporting a child’s education. Such schemes roll out money at key educational milestones and also ensures that the education expenses are paid in the unfortunate event of the policyholder's death.

• For wealth creation - schemes that help customers in investing and saving their money to create a good corpus of funds.

• For medical benefits - schemes aimed at providing financial assistance during times of medical emergencies. These schemes often offer special riders for protection against certain major or critical illnesses.

Categories based on the death benefit furnished to customers:

ULIPs can be categorized into two types based on the death benefit furnished to customers-

• Type I ULIP - these schemes pay a higher amount than the sum assured value or the fund value to the beneficiary or nominee in case of the policyholder's death.

• Type II ULIP - these schemes pay the assured sum value as well as the fund value to the nominee or the beneficiary in case of the policyholder's death.

Charges Involved in ULIP Premium

These components may be involved in ULIP Premiums:

Fund management charges - It is meant for managing the fund. It is generally levied as a certain percentage of the total value of assets.

Discontinuation charges - The customers have to bear these charges in case they decide to discontinue the ULIP plan before the completion of the lock-in period.

Mortality charges - It is for compensating the insurance company if the policyholder doesn't live to the assumed age. It is usually charged on a monthly basis and the amount differs based on the age and lifestyle of the policyholder.

Surrender charges - It is levied in case of premature withdrawal of units.

Premium allocation charges - It is imposed on policyholders to compensate for the expenses incurred while issuing the policy. It includes distributor fee and the cost of underwriting of funds.

Policy administrative charges - It is aimed at recovering the money for maintaining the ULIP policies. It involves the cost of paperwork, premium intimation, etc.

Fund switching charges - It is the fee for switching the fund type.

ULIP Plan Calculator

Many insurance providers offer a ULIP plan calculator to help policyholders in calculating their premiums. These tools also calculate the returns that the policyholders are eligible to receive for a particular ULIP. Policyholders are required to provide the specific policy name along with the time period of the policy for the tool to calculate the premium amount and the expected return. Some of these calculators also allow users to compare different ULIPs by calculating the returns each plan will provide for the specified time period. The potential policyholders can accordingly choose the plan that best fits with their requirements.

ULIP Riders

ULIPs often offer add-on benefits to enhance the protection provided. They can be added to an existing policy and they offer additional coverage over and above the coverage offered by the policy. These are optional add-on benefits that the policyholders can choose based on their requirement and need.

These are the various kinds of riders offered:

• Accidental Death or Permanent Disability Benefit Rider: it provides the policyholder with a cover in case he/she is permanently disabled. It also covers for the policy holder's accidental death in which the nominees receive the additional benefit.

• Critical Illness Rider: it provides financial assistance to the policyholder if he/she is diagnosed with any of the critical illnesses as defined by the rider.

• Waiver of Monthly Premium Rider: it offers a waiver from premium payment if the policyholder meets with an accident.

• Term Rider: it provides a monthly income to the beneficiary or nominee in the event of the policyholder’s death.