A prudent investor seeks to maximize returns with minimum risk. This is feasible if one was to opt for a hybrid financial instrument i.e. one which offers life cover as well as market linked growth. A Unit Linked Insurance Plan (ULIP) is one such innovative policy with the dual advantage of insurance cum investment in a single plan. We shall now study what is ULIP policy and how it works to get a better understanding of the workings of this investment-cum-insurance plan.
Meaning of ULIP
ULIP stands for Unit Linked Insurance Plan, which provide market-linked returns along with life insurance coverage. The premiums paid, after adjusting the charges, are invested in a fund as per the investor’s choice – equity, debt, balanced, etc. The value of fund or the corpus, is reflected by way of net asset values, or NAVs. On maturity, this fund value is paid out. In the case of death, higher of the sum assured promised or the available fund value is paid.
Features of ULIPS
Now that we have delved into how ULIP works, we shall study each of its features
- Choice of funds: When it comes to ULIP funds, you get the following three options:
- Equity Funds, which invests primarily in the stock market with an inherent aggressive investment strategy. The risk and returns expected from these funds are high.
- Debt Funds may invest in debt and bond market with a conservative investment strategy. The risk and returns expected from these funds are low.
- Balanced Funds allow you to invest in a combination of equity and debt instruments with a moderate investment approach. The risk profile is moderate, and the returns are balanced. This is preferred by investors who wish to earn in-between returns i.e. higher than debt instruments, but lower than high risk equity.
- Life cover: ULIPs provide insurance cover which is expressed as a percentage or multiple of the premium paid. In case of death, higher of the sum assured or the fund value is paid. ULIPs offer guaranteed life cover, payable on death.
- Charges: Charges like premium allocation charges, administration charges, fund management charges, mortality charges, etc. are deducted every year or every month from the premium payment, depending on the type of charge and policy terms.
- Switching: ULIPs allow switching of fund allocation, depending upon the investment approach (aggressive, moderate or conservative risk profile) across the plan tenure. The switching facility is free of cost, up to a specified extent in one policy year.
- Partial withdrawals: ULIPs facilitate the unique option of partial withdrawals, which is lacking in other insurance plans. In ULIPs, the policyholder can withdraw the fund value partially for any financial requirements without hampering the plan continuity. This withdrawal is permitted any time after the first five years of the plan. However, a limited number of withdrawals are free of charge.
- Top-ups: ULIPs enable additional investments into the plan through the option of top-up premiums. Thus, the policyholder is free to invest any surplus, available funds in the plan, apart from the premiums paid to contribute towards building a sizeable corpus on maturity.
In conclusion, ULIP is a comprehensive, easy to understand product suited to the divergent needs of an investor which combines the earning advantage of mutual funds with the low risk profile of a life insurance product. In other worlds, it would not be an exaggeration to say that ULIPs offer the best of both worlds i.e. the world of insurance and of investment.