Investors encounter a lot of jargon when dealing with financial products be it mutual funds, insurance, or direct equities.
Let’s take a look at some of the most important terms you will come across while investing in unit-linked insurance plans or ULIPs, which are a mix of investment- cum-insurance products offered by insurance firms.
Free look period
Many a time, investors do not conduct enough due diligence before signing on the dotted line. After purchasing a policy, you could realise that the terms and conditions of the policy or the policy don’t suit your requirement. Every insurance company provides a 15-day free look period (if purchased through solicitation in person) and 30 days (if purchased through distance marketing or brought online) within which the policyholder can surrender the policy back to the insurer. Note that the free look period includes all days (including Saturday and Sunday). According to The Insurance Regulatory and Development Authority of India, or IRDAI, the policyholder is refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover. Since ULIPs invest a portion of the premium in equities, any adverse market movement can affect the fund value. If the market has dipped after you bought the policy, you could get less than the premium if you decide to surrender your policy within this free look period. On the contrary, if the market has risen during the free look period, you would get higher proceeds. That would depend on the extent of exposure to equity.
Participating/Non-participating
Participating policies pay out dividend/bonus to policyholders by allowing them to participate in the company’s profits. On the contrary, non-participating policies do not offer any dividends. Many ULIPs offer participating policies. The percentage of dividends or bonus is usually uncertain as it depends on the performance of the company. The premium for non-participating policies is relatively lower in comparison to participating policies. Term life insurance is an example of non-participating policy, which are also known as without-profit or non-par policy.
Loyalty addition
Loyalty addition is also known as additional allocation, extra allocation or premium booster. Insurers offer some extra money in the form of loyalty addition as a percentage of the fund value or a percentage of the premium to encourage policyholders to pay their premiums on time or stay invested throughout the term of the policy. The quantum of loyalty addition depends on a number of factors like premium amount, policy term, premium payment term, among others. Some companies offer loyalty addition after five years while others offer from the beginning or at the maturity. Do note that loyalty additions stop accruing once you stop paying your premium before the term of the policy.
Switch
This option allows you to switch from one policy/fund to another. For instance, suppose your current ULIP has equity and debt exposure of 60:40. You can choose to invest in another fund that has a higher or lower equity/debt exposure. Some insurers allow you to make four switches free of cost in a year. Any additional switch transactions are charged a nominal fee.
Claim Settlement Ratio
It is calculated by dividing the total number of claims approved by the total number of claims received by the company. This ratio gives an indication of the likelihood of the company honouring your nominee’s claim in case of an untimely death. It is advisable to opt for a company that has a higher claim settlement ratio. Do note that claims also get rejected due to incorrect information provided by policyholders. Hence, it is important to disclose all the facts. Claim settlement ratio should not the sole criteria while selecting a product though.
Persistency Ratio
This ratio indicates the number of policyholders that are actively paying premiums to the company. It is calculated by dividing the number of policyholders paying the premium by net active policyholders, multiplied by 100. IRDAI data shows that the 61st month persistency for life insurers in 2019-20 was 38%. Policyholders discontinue paying premiums due to a variety of reasons like dissatisfaction with the services of an insurer, dismal performance of ULIPs, and so on. One indication of a low persistency ratio is that policyholders are not satisfied with the services of an insurer or were mis-sold the policy due to which they don’t wish to continue. Thus, investors would do well to opt for an insurer whose persistency ratio is high.
Rider
Riders allow you to customise your existing ULIPs by enhancing your protection by paying a nominal charge. You can add benefits like waiver of premium, accidental death benefit, partial or permanent disability, critical illness and other benefits offered by insurers. This option gives you the benefit of securing against any unforeseen events without buying a new policy.
Surrender Benefit
It is simply the value you get when you withdraw from the policy. ULIPs have a lock in period of five years. However, you can still surrender your policy before five years. Once you surrender your policy, your life insurance cover ceases. The insurer will give you the proceeds after deducting surrender/discontinuance charges and any other charges after the lock in period of five years. It is advisable to stay invested in a ULIP for a longer time to recoup the charges.
To sum up, one should not rush to invest in a product just because it offers tax deduction, be enamoured by past returns, or invest just because the relationship manager is pushing to go for it. It is advisable to do some research on your own and take a decision after consulting your financial adviser to understand which products best fit your financial goals and risk appetite.
Use these tools to screen and filter ULIPs.
