ULIP stands for unit linked insurance plan. When it comes to insurance, there are three types of insurance policies that are available for a person looking for insurance coverage:
An endowment plan or a money back plan takes premiums and gives a fixed return on maturity of the policy. A term insurance plan is a pure insurance plan which only provides insurance coverage without any maturity benefit. Both these plans may not keep up with increases in the stock market and the investment growth opportunities there. The ULIP is a plan which addresses both these deficiencies.
A ULIP means a unit linked insurance plan. In traditional life insurance or an endowment plan, a portion of the premium is invested by the insurance company, but since it is not linked to the market, the benefits are not enjoyed by the policyholder. The growth of the corpus is defined and may not provide the best returns.
In a linked plan, the savings component of the premium is invested in different funds and the policyholder can access the funds and assess their performance. These funds are like mutual funds where the corpus is invested in different assets. The funds are based on the risk tolerance of the individual. They may be conservative funds or aggressive funds. It is possible to switch between these funds at any point of time without any capital gain implication.
A ULIP plan has a sum assured which is like traditional life insurance. However, on maturity, the payout is the higher of:
Fund value of ULIP investments
105% of the total premiums paid to the insurance company
In case of death of the policyholder, the death benefit or higher of the fund value is paid out. Some insurance companies have a waiver of premium, where in case of death of the policyholder, future premiums are waived off and investment is done by the insurance company and the fund value is paid out on maturity. These policies also pay out death benefit on death of policyholder. Generally, these type of policies structure themselves as child education policies which have double or triple benefits for the family.
When you invest in a Unit Linked Insurance Plan, you need to be sure what your end goal is. If you want it to be an additional form of support for your child’s education or for your retirement. You need to pick the policy accordingly. You need to understand what is ULIP plan and what exactly the insurance company is offering. The premium charged must be commensurate with the benefits you will get even on maturity. If the insurance company is investing too little in the market, or they have a lot of fund management expenses, then the policy may not be as beneficial. It is mandatory to read the insurance document carefully.
The IRDA or Insurance Regulatory Development Authority allows policyholders to surrender their insurance policy in case they are not satisfied with the policy. In case of ULIP, surrender is possible after the end of a lock in period. According to IRDA rules, the lock in period for a ULIP is 5 years
During the lock in period, the policy does not permit partial withdrawals. ULIPs can be surrendered while in the lock in period, but the funds won’t be paid out till the end of the lock in period. The funds will be split up to cover the cost of the insurance company. Any surrender done after the end of the lock in period will not incur any charges. The Insurance company will pay the total fund value to the policyholder in its entirety.
ULIP provides facility for partial withdrawal of funds as well. Depending on the insurance company, there is a specified percentage of funds which can be withdrawn. No partial withdrawal is possible before the end of the lock in period. This facility depends entirely on the insurance company.
ULIP provides transparency about the performance of the funds. In a non-linked life insurance policy, it is difficult to say how the funds are performing, since the performance of funds is not the objective of a traditional life insurance policy.
A Unit Linked Insurance Plan can work out excellent when you club it with your child’s education goal. An insurance policy offering benefits can work well to provide security and a maturity value at the end of the policy period. However, you need to check the costs of the insurance company and their Settlement Ratio, or the number of claims they settle. That way you can be sure about the settlement.
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