Unit Linked Insurance Plans

What are Unit Linked Insurance Plans (ULIPs)?

Unit Linked Insurance Plans (ULIPs)

In the last few years, ULIP has become more popular among individuals than a term plan or an endowment plan. The people who have chosen term or endowment plans are switching to Ulip’s. Therefore it is very important to understand how ULIPs work…

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ULIP is an abbreviation of the Unit Linked Insurance Plan.

Definition- Unit Linked Insurance Plans (ULIPs) are a combination of insurance & investments. Unlike traditional subject to the risk factors where the risk is borne by the policyholder, the investment risk is related to the stock markets & accordingly the NAVs of the units go up & down depending upon the fund’s performance & the factors affecting the capital market.

Different funds offered by ULIPs

General Description Nature of investments Risk Category
Equity funds Investing in company’s stock. Medium to high
Income, fixed deposits & bond funds Investing in Government securities & in corporate bonds. Medium
Cash Funds Investing in cash, bank deposits & money market Low
Balanced Funds Combination of equity investment& fixed interest instruments Medium

Advantages of taking Unit Linked Insurance Plans (ULIPs)

  1. Provide life cover.
  2. Tax saving under 80CC.
  3. It also gives you the opportunity to invest in the stock market.
  4. Gives you the option of long term investment too.

Basic Charges on Unit Linked Insurance Plans (ULIPs)

  1. Premium Allocation Charges- It normally includes initial & renewal expenses apart from commission expenses.
  2. Mortality Charges- This charge is provided for the Cost of Insurance Coverageunderthe plan. A lot of factors are responsible for mortality charges like age, amount of cover etc.
  3. Fund Management Fees- These are fees levied for management of the funds and are deducted before arriving at the Net Asset Value(NAV)
  4. Policy/Administration Charges- These are the fees for administration of the plan and levied by the cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
  5. Surrender Value Charge – A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.
  6. Fund Switching Charges- Limited fund switching charges may be allowed every year.
  7. Service Tax Deduction-Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

Things to remember before going for Unit Linked Insurance Plans (ULIPs)

  1. Invest for a long term-A long-term investment will give you good results.
  2. Be sure about the charges- Make sure about the charges that the company will take from you. There should not be any hidden costs.
  3. Invest at your own risk- Investing in ULIP is also risky, you should check your risk appetite before investing.

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