What are 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)
- Provide life cover.
- Tax saving under 80CC.
- It also gives you the opportunity to invest in the stock market.
- Gives you the option of long term investment too.
Basic Charges on Unit Linked Insurance Plans (ULIPs)
- Premium Allocation Charges- It normally includes initial & renewal expenses apart from commission expenses.
- 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.
- Fund Management Fees- These are fees levied for management of the funds and are deducted before arriving at the Net Asset Value(NAV)
- 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.
- 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.
- Fund Switching Charges- Limited fund switching charges may be allowed every year.
- 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)
- Invest for a long term-A long-term investment will give you good results.
- Be sure about the charges- Make sure about the charges that the company will take from you. There should not be any hidden costs.
- Invest at your own risk- Investing in ULIP is also risky, you should check your risk appetite before investing.
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