Every one of us always tries to provide financial protection as well as insurance coverage for our whole family. You try your level best to fulfill your family’s dream and secure them in every possible way. To safeguard your family with financial security and insuring them, you need to have a full proof plan. Have you ever thought of any alternative where your both needs are satisfied under a single plan? No? Then don’t worry. ULIP is your best option.
Unit Link Insurance Plan commonly known as ULIP is a product which is a combinantion of both insurance and investment. The main aim of ULIP is that it provides life coverage along with that create wealth. When you invest in ULIP, the insurance company puts a part of your investment for life insurance and invest the remaining amount in mutual fund depending on the goal and risk-appetite of the investors. If you
How does ULIP functions?
ULIP policy ensures you with the benefits of insurance protection as well as capital growth. Your family gets life insurance protection and on top of that are financially secured for the rest of their future.
Now, let’s get into the functioning of ULIP.
After you invest in ULIP, the insurance company invests a part of the premium in equity or debt market as per your investment goal and risk taking capability and the rest amount is used for insurance coverage. Your investment goal can be- your child’s higher education, wealth generation or retirement plan. Depending on this financial goal and your risk appetite, fund managers in the insurance company invests in equity or debt fund and manages your portfolio. If you are planning for a long-term goal and is risk lover, then you can invest in an equity fund. But if you are a risk aversor, then you should definitely go for debt fund.
As per the regulation of Insurance Regulatory and Development Authority of India (IRDAI) in 2010, the lock in period of ULIP was fixed for 5 years. But to enjoy the benefits of ULIP which is a long-term product, you can hold the policy for a good 10 to 15 years.
Types of ULIP Plans
There are 2 types of ULIP Plans-
Type 1- In case of death of the policy holder, the Type 1 ULIP plan pays higher the sum assured or the fund value to the nominee of the holder.
As the sum at risk lowers, the mortality charge keeps on reducing every year. The sum at risk is the amount that the insurance company pays the nominee from its pocket when the policy holder dies.
Type 2- In case of death of the policy holder, the Type 1 ULIP plan pays the sum assured plus the fund value to the nominee.
The premium you would pay for Type 2 ULIP plan is higher tahn that of Type 1.
Types of Charges for ULIP
- Charges for Premium Allocation– It is a front load charge which includes intermediary expenses and initial and renewal expenses. Usually, it is charged at a higher rate.
- Charges for Fund Management– To manage different funds, the insurance company levies this charge. It is charged daily up to a maximum of 1.35% per annum of the fund value. This charge is deducted from the NAV amount. Usually, this charge is higher for equity fund and lower for debt fund.
- Mortality Charges– To provide insurance coverage, this charge is levied. It is charged on a monthly basis depending on your age, sum assured policy etc.
- Charges for policy administration– To carry out the expenses of the insurance company for managing a life insurance policy, this particular charge is levied. Usually, it is charged as your premium’s percentage or at a fixed rate.
- Charges for fund switching– With the help of fund switching option, you can easily switch your fund as per your requirement. Usually, there is a certain limit to switch funds per year. If you exceed the limit, a certain amount of switching fee is charged.
- Charges for Surrender- For partial or full withdraw of funds, surrender charges are imposed as your premium’s percentage.
- Charges for Discontinuation- The insurer charges a discontinuance fee on your premature discontinuation of ULIP plan within the lock-in period.
Benefits of ULIP Plan
- Life insurance coverage and investment- both in a single plan
- Transparent in its functioning and charges imposed
- The premium paid has tax benefit up to Rs. 1.5 lakhs under section 80C. Also, return on the maturity is tax exempt under section 10(10D
- It provides you the flexibility to switch your fund between debt and equity
- It helps you to fulfill your long-term investment goal such as- child’s education, retirement plan etc.
- Offers different fund options to invest based on your risk appetite