Of late, we have seen Unit Linked Insurance Plans (ULIPS) flooding insurance market and bringing in unprecedented changes in Indian Insurance Industry. Many considered it as a panacea for Insurance market, considering its potential to bring high returns and flexibility. Even though almost all insurance companies offer ULIP policies, choosing the right plan for you is tough and require some expertise – thanks to the highly technical nature of it.
ULIPs can give rich returns if invested and manipulated wisely. On the other hand, mistakes committed while selecting or investing in your plan can bring in unexpected heavy loses also. This article will give you all the basic knowledge to make investing in ULIPs easy and risk free.
‘UNIT’ and its significance in ULIP plan
As the name implies, base of a ULIP plan is UNIT, which is the smallest single entity of the plan. Market value of Units may change day by day depending on the market where the the money is invested. When ever you invest in a ULIP plan, a certain number of UNITS of the plan will be allotted and will be added to your policy account. Number of units allotted will be equal to the Amount Invested /Unit Price.
‘CHARGES’ involved while purchasing a ULIP plan.
Charges involved in your ULIP plan is one of the most important factors, which is likely to determine it’s maturity value in the future. Different types of charges may be deducted from your ULIP plan depending on the type and nature of your plan. The most important thing while selecting your plan is to make sure that the charges of your ULIP plan is reasonable based on the offers and features. The best way to know more about the charges involved in the policy is to check the Benefit Illustration and the Brochure of the scheme.
General types of charges and its brief description is given here.
Premium Allocation Charge
Premium Allocation charge is deducted up front from the premium paid by the client to meet the initial expenses of the policy. Initial expenses may include cost of distribution of the policy, cost of medical expenses, cost of underwriting etc. Amount available after the deduction of Premium Allocation Charge will be allotted to the fund specified by the client.
Policy Administration Charge
Charge deducted to meet the expenses to maintain the policy by the insurance provider.
Amount deducted to meet the expenses incurred for providing insurance coverage to the policy holder. Mortality charge varies depending on the age of the policy holder, Sum Assured or Sum at Risk (Difference between the Sum Assured and the fund value) etc.
Fund Management Charges
Amount available under ULIP plan will be invested in certain type of fund, chosen by the customer. Fund Management Charges may be deducted from the fund value to meet the expenses incurred while managing the funds.
What does the Fund Value of your ULIP mean?
Unlike the conventional plans, value of your ULIP policy at any point of time is determined by its FUND VALUE. Fund value is generally calculated by taking the product of Number of Units available and the Unit Price.
FUND VALUE = Number of UNITS * UNIT Price
What is Surrender Charge or Exit Loading?
Some ULIP plans apply exit loading or surrender charge when you prematurely close your policy. Amount available after deducting the Surrender charge only will be available when you close your policy.
Which are the different funds available in your ULIP policy?
The main strength and flexibility of ULIP is that you can choose where your money is invested. You can even customize what portion of it is invested in each segment. Generally it is divided into four funds as given below.
|Fund Type||Investment in Government / Government Guaranteed Securities / Corporate Debt||Short-term investments such as money market instruments||Investment in Listed Equity Shares||Details and objective of the fund for risk /return|
|Bond Fund||Not less than 60%||Not more than 40%||Nil||Low risk
|Secured Fund||Not less than 45%||Not more than 40%||Not less than 15% &|
Not more than 55%
|Steady Income -Lower to Medium risk|
|Balanced Fund||Not less than 30%||Not more than 40%||Not less than 30% &|
Not more than 70%
|Balanced Income and growth - Medium risk|
|Growth Fund||Not less than 20%||Not more than 40%||Not less than 40% &|
Not more than 80%
|Long term Capital growth - High risk|
Performance of the fund varies drastically based on the market fluctuations if the fund is having a major portion invested in equities.
View the performance of LIC’s Bima Plus Funds.
What is fund switching and how it can be used to increase the returns?
Switching is the procedure of changing the investment amount from one fund to other. Switching when used judiciously is a great tool to protect your valuable money and increase the returns form ULIP policy. Generally insurance company allows free switching to some extend. Life Insurance Corporation of India(LIC) allows up to four free switching every year and charges Rs. 100 there after for every switching.
Which is the best premium payment ‘MODE’ for ULIP Payment?
ULIP policies can generally be paid by all the modes of payments like, Yearly, Half Yearly, Quarterly and Monthly ECS (Electronic Clearance service) through bank Accounts. The general idea is to spread your investments evenly to the extent possible so that it works as a Systematic Investment Plan (SIP). So the preferable mode for ULIP investment is monthly mode if possible.
What is Lock-in period?
Lock in period is the minimum period of time after which policy can be en-cashed. Lock In period of all ULIP policies have been enhanced to five years by IRDA. If you surrender your policy before lock in period, the fund value available in the policy on the date of surrender is locked, but the amount will be available only after the lock in period.
ULIP policies provide a nice investment platform with umpteen number of benefits and learning these key factors will help you to enhance and protect your hard earned money.
Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.