Unit Linked Insurance Plans (ULIP's) : Introduction
A Unit linked insurance plans are a special kind of insurance policies which have a benefit of life insurance and also serves as an investment tool. In a unit linked insurance plan there are two parts in the premium a client pays, the first part of the premium goes into covering the life of the policy holder and the second part goes into investments.
Almost all insurance companies give their customers a choice to select the investment mix. They can go for 100% equity funds or 100% debt funds or a mixture of both. In a unlit linked insurance plan the customers are also given choice to switch from one fund to another. The returns from the insurance policy is directly related to the performance of the funds. The only drawback of unit linked insurance plans is its charges for first few years, which varies from 30% to 70% of the premium.
Unit Linked Insurance Plans or ULIPs as they are more popularly called are a boon to investors and the insurance company alike. They attract the investor with the promise of attractive returns while at the same time promising insurance protection. Thus, these plans act as dual benefit plans promising insurance and returns in one bundle. Perhaps this is the reason why these plans sell as hotcakes and constitute the major proportion of the insurer’s business. The plan’s unique design and benefit structure appeals to every investor whether he is looking for aggressive returns, moderate one or very conservative returns. Investor of every risk profile can invest in the market through a Unit Linked Insurance Plan and also reap the benefits of an added insurance coverage.
So, what makes the Unit Linked Insurance Plans attractive and unique? Here are some of the best features and benefits that a Unit Linked Insurance Plan has to offer:
• Market-linked returns – contrary to traditional life insurance plans where there are guaranteed returns, Unit Linked Insurance Plans provide returns which are linked to the capital markets. The premiums paid by you are invested in different funds as per your choice. These funds invest the money in capital markets. Thus, any return generated on your invested premium reflects the market-linked returns and so these plans are called linked plans.
• Insurance coverage – besides providing an avenue for investment in the capital market, Unit Linked Insurance Plans also provide life insurance coverage. Thus, these plans are said to have dual benefits of investment and insurance.
• Guaranteed Death Benefit – even though the returns earned by your investments are subject to market risks and volatility, the death benefit payable in case of unfortunate death of the insured during the plan tenure is guaranteed. The death benefit is usually higher of the Fund Value or the Sum Assured promised under the plan. While the Fund Value is market dependent, the Sum Assured is fixed at plan commencement and is guaranteed.
• Varied fund options – the premiums are invested in the available funds which then invest the corpus in the market. Every Unit Linked Insurance Plan has three basic kinds of funds. These are the equity funds which have high risk and high return potential, debt funds which have a low risk-low return portfolio of investments and the balanced funds which provide moderate returns by combining the equity and debt investments in a balanced way. Thus, the policyholder can choose any fund as per his risk appetite and can also invest in multiple funds as per his investment strategy.
• Easy Liquidity – the best part about Unit Linked Insurance Plans are their liquid nature. After a compulsory period of 5 years, the policyholder is free to make partial withdrawals from the Fund Value to finance his requirements and needs.
• Flexibility – apart from liquidity, ULIPs are also very flexible. They have the switching feature which allows change in the funds if the policyholder’s investment strategy changes, top-up facility for injecting additional funds in the plan, premium redirections which redirect the future premiums to another fund than that which was originally selected, etc. these flexible features allow policyholders to make necessary changes in their plans in tune with their investment profiles.
• Tax benefits – as is with other plans of insurance, Unit Linked Insurance Plans also allow tax benefits. The premiumfor ULIP insurance plan is exempted up to Rs.1.5 lakhs as per the current tax regulations while the claims received are completely tax-free without any limitation. The respective sections which allow such exemptions are Section 80C and Section 10(10D).
So, now you know the benefits and features of a Unit Linked Insurance Plan which differentiates it from other insurance plans. Every Unit Linked Insurance Plan available in the market today provides all the aforesaid benefits. All ULIPs have the same feature and only small differences in these features make ULIPs different from the rest. Some plans have variety of funds apart from the basic ones while some allow unlimited switching facility. These nuances of different plans distinguish their characteristics and help us to make comparisons between them.
Let us understand how these features help in comparing the various Unit Linked Insurance Plans available in the market so that when you are thinking of buying a plan for yourself, you would know exactly which features to compare to opt for the best plan from the rest. Here is your guide –
• Look at the Sum Assured multiple - Unit Linked Insurance Plans are usually meant for investment purposes. The Sum Assured under the plans are expressed as a multiple of the annual or single premium paid. These multiples are different in different plans. Some plans allow a lower multiple while others allow very high multiples too. So, if you are looking to avail a good coverage from your Unit Linked Insurance Plan, compare the Sum Assured multiple allowed under the plans and go for the plan offering the highest multiple. However, remember that a high level of Sum Assured would also result in high mortality charges and so those of you who have pure investment motives should opt plans which have the lowest Sum Assured multiples to save on the mortality charges.
• Consider the minimum premium required – in a ULIP, the premium payable is determined by the policyholder. However, the company has a minimum premium criterion. Check for this level against the amount you are willing to invest. If the plan is good but the minimum premium criterion is higher than the amount you can afford to invest, the plan is no good for you.
• Consider the variety of funds on offer – though the funds offered by every unit linked plan comprises of equity, debt and balanced funds, companies have diversified the funds further than these three basic funds. Higher the fund options available, greater would be the diversity in asset allocation and we all know that a well-diversified fund option is more favorable for strategizing our investments.
• Look at the charges – this is the most important consideration when you are considering investing in a Unit Linked Insurance Plan. There are multiple types of charges in unit linked plans which are clearly mentioned in the plan brochure. These charges include the premium allocation charge (the commission payable to the agent for selling the policy), the fund management charges (for managing the funds), administrative charges, mortality charges (for providing life insurance coverage), etc. These charges are deducted from your investments and higher the charges, the lower would be your fund. So, when you are considering a plan, understand its charge structure and choose a plan which has the lowest charges.
• Additional additions – unit linked plans depend on market returns and no bonuses are declared under these plans. However, many plans have the feature of loyalty additions or guaranteed additions. These additions are added at a fixed rate to the fund value when certain conditions are fulfilled. Needless to say, these additions increase the fund value and if your plan has any of these additions in its feature, you would be better off.
• Past Performance – analyzing the past performance of the funds of the unit linked insurance plan is also important. Future returns are not based on past performances but the past performance can give you an estimation of the fund’s performance since inception. This past record is a very important tool in knowing whether your plan would yield the desired results or not and should be compared.
• Company history – this is perhaps the last and the least important factor but still should be considered. The company’s claim settlement record shows how trustworthy the insurance company is. This record is easily available with the Insurance Regulatory and Development Authority’s (IRDA) website. You should, therefore, compare the company’s Claim Settlement Ratio against that of the other insurance companies and choose the company with the highest ratio as it indicates a higher proportion of claims settled.
So, these were the points or parameters against which you should judge any ULIP policy before you settle on investing in it. Whatever the plan is, you should stay invested in the ULIP insurance plan for a longer tenure for reaping the maximum possible returns and so it becomes essential to compare between the different plans before making the choice. A wrong plan would tie your money for a long time and if you try and take it out sooner you would stand to lose. So, compare all the plans before buying one.
Confused, are you? Having elaborated the different points of consideration I might have confused you in choosing the best ULIP plan for yourself. Relax! I did give you the points of consideration and would also give you an easy way to compare the best ULIP plans in India. Our Unit Linked Insurance Plans Comparison facility enables you to compare ULIP plans easily. Just enter your contact information and our executives would get in touch with you regarding the best plan that meets your requirements. So, compare best ULIP plans in India easily through our website and we would also give you the best ULIP quotes.