Understanding ULIP: A Banking Awareness Guide
by Yuvi K - December 16, 2023
Understanding ULIP – A Banking Awareness Guide
The world of banking and investments has been constantly on the rise in the past few decades. To meet the demands of the growing market, the banking industry has come out with various investment products and services designed to suit the individual needs of investors. One of the most popular investment products in the world today is the Unit Linked Insurance Plan, widely known as the ULIP, which is a combination of two distinct investment options – insurance and market-linked investments. To understand the intricacies of ULIPs, one first need to get a better understanding of both the concepts – insurance and investments.
What is ULIP?
Unit Linked Insurance Plans (ULIPs) are the investment instruments made available by the insurance companies in India. They are combination of insurance and investments, wherein a certain part of the premium goes towards purchasing a life insurance policy while the rest of the premium is invested in selected funds. On maturity, the death or survival benefit, based upon the life insurance element, and the return, based upon the investment element, are payable.
Key Benefits of ULIP
Unit Linked Insurance Plans are popular because they come along with several benefits:
- ULIPs allow the policyholder to benefit from the dual advantages of life insurance and investments. offered by the insurance company.
- The policyholder has the option of selecting the amount of funds to allocate to the insurance and investments.
- ULIPs provide easy access to the capital markets and allow the policyholder to invest in a wide range of investment funds such as equity funds, debt funds, and even international funds.
- It gives the policyholders the flexibility to switch between funds in accordance with their needs.
- ULIPs also offer tax benefits, which are applicable under Section 80C of the Income Tax Act.
- ULIPs have an in-built facility of automatic amount adjustment, which allows the policyholder to adjust the amount according to the financial needs.
- Most insurance companies also offer additional riders which can be added to the ULIP policy and can be used to get additional life coverage or specific benefits such as waiver of premium, etc.
How ULIPs Work?
The concept of ULIPs is quite simple. When you purchase a ULIP plan, the amount of money you pay is split between the insurance and investment element. The premiums paid by you are divided into two parts:
- Premium allocation charges: A part of the premium (which is typically around 25%-30%) goes towards the insurance company’s back-end charges like risk-premium charges, mortality charges, administration charges, and fund management fees, etc.
- Fund value: The remaining part of the premium is invested in various market linked investment funds. This amount is further divided into different funds depending upon the risk profile of the investor. The policyholder has the option to select the funds where he wants his money to be invested.
Important factors of ULIP:
| Funds | Features |
|---|---|
| Equity Funds | These funds invest in various equity instruments like stocks, mutual funds and Exchange Traded Funds (ETFs). These funds carry a higher risk but also offer higher returns. |
| Debt Funds | Debt funds are relatively safe as they invest in fixed income instruments like debentures and bonds. They offer a lower return but also come with less risk. |
| Index Funds | Index funds track a particular index and are usually a good option for conservative investors. |
ULIPs also have an in-built facility of Auto-fund switch, wherein the policyholder can switch between funds and adjust the amount according to his needs.
ULIP Charges
Apart from the premium allocation charges, ULIPs also involve other charges such as:
- Fund Management charges: These are the charges levied by the insurance company for management of the funds. The charges are deducted from the fund value.
- Mortality Charges: Mortality charges are charges applicable to the life insurance component. These are the charges the insurer charges for providing death benefit in case of the unfortunate event.
- Surrender Charges: Surrender charges are the penalty charges levied if the policyholder tries to exit the ULIP plan within the first 5 years.
Conclusion
In conclusion, ULIPs from the insurance companies are one of the most popular and beneficial investment options that combine the advantages of both insurance and investments. They are much more flexible than other life insurance plans and offer the policyholders the chance to select funds according to their own need and risk profile. However, before investing in a ULIP, it is important to be aware of the various charges associated with it and also the different funds available in the market.
This article is only intended for informational purposes and should not be considered as a professional advice.
