How do ULIPs work?

By Guest |  16-01-17 | 
 
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Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

Unit Linked Insurance Plans, or ULIPs, are insurance plans which combine the benefit of mutual funds with the benefit of life insurance in one plan or product. These plans provide market-linked returns along with life insurance coverage.

The premiums that you pay for your plan get adjusted for the relevant charges which are mentioned beforehand. The net premium is then invested in a fund which is chosen by you – equity, debt, balanced etc.

The Fund Value reflects your growing corpus by way of net asset values, or NAVs. On maturity, this Fund Value is paid. In the case of death, higher of the Sum Assured promised or the available Fund Value is paid.

The Funds

The first feature is the choice of funds available. Every insurer offers a variety of three basic types of funds which are:

    • Equity Funds

These funds invest primarily in the equity market and hence follow an aggressive investment strategy. The risk presented by these funds is high and so is the return generating potential.

    • Debt Funds

On the other end of the spectrum are debt funds which follow a conservative investment strategy. These funds invest in the debt and bond market and hence have a low-risk strategy. The returns from these funds, as obvious, are also conservative and low.

    • Balanced Funds

Investors who wish to earn returns higher than those generated by the debt funds but are averse to the high-risk strategy of equity funds find respite in balanced funds. These funds are a combination of equity and debt funds and follow a moderate investment strategy. The risk is moderate and the returns are decent which are higher than debt funds but lower than equity funds.

The Life Cover

Since ULIPs are insurance plans, insurance cover is available and is expressed as a percentage or multiple of the premium paid. In the case of death, higher of the Sum Assured or the Fund Value is paid. Thus, the life cover promised under ULIPs is guaranteed to be payable on death.

  • Charges

The premiums you pay would be subject to certain charges before they are invested in the chosen fund. These charges include the premium allocation charges, administration charges, fund management charges, mortality charges, etc. and are deducted every year or every month depending on the type of charge and policy terms.

  • Switching

Switching means transferring investments from one chosen fund to another. If your investment strategy changes over the plan tenure, the plan allows you to change your investment funds through switching facility which is free of cost up to a specified extent in one policy year.

  • Partial withdrawals

The unique part about ULIPs which is absent in other insurance plans is the facility of partial withdrawal. In ULIPs, the policyholder can withdraw the Fund Value partially for any financial requirements without hampering the plan continuity. This withdrawal can be made any time after the first five years of the plan and a limited number of withdrawals are also free of cost.

  • Top-ups

ULIPs also provide the facility of making additional investments into the plan through the facility of top-up premiums. Thus, the policyholder can use any surplus fund for investment in the plan apart from the premiums which are paid and reap the benefits of good returns.

Source: Advisorkhoj.com

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