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 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 policy holder 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 policy holder 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:
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.
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 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 illness.
- Type 1 ULIP: In case of death of the policy holder, type 1 ULIP plan pays higher of the sum assured or the fund value to the nominee.
- Type 2 ULIP: In case of death of the policy holder, type 2 ULIP plan pays the sum assured plus the fund value to the nominee.
Why invest in ULIP plans
You get insurance + investment benefit. Returns are high as your money is invested in the stock market.
Helps you achieve your financial goals such as education for your children and also money for your children’s marriage.
Riders gives you lump sum amounts at critical times when you need money the most. They supplement your returns.
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
- 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).
- 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.
- ULIPs have a lock-in period of 5 years. This force 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.
- 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.
- 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).
- You can invest windfalls 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.
- You will have flexibility in selection of a life cover which is a part of the ULIP, depending on your financial capabilities.
- Almost all ULIPs offer policy holders an option to change the premium amount. Therefore, according to your ability to pay premiums, you can either increase or decrease it.
- 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.
- 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.
How to make a claim on a Personal Accidental Insurance Plan?
Inform the insurer about the accident:
- The insurer must be informed about the accident as soon as possible. The insurer may also be informed while the insured is on the way to the hospital. In order to show proof that the claim has been filed with the insurer, the policy number or reference number of the insurer should be communicated.
Inform the insurer at the time of hospitalization:
- Fill the claim form.
- Submit the FIR or police report if required.