The Unit Linked Insurance Plan (ULIP) are the market-linked products that offer the best investments schemes and programs provided by an Insurance Companies. Unlike the other insurance policy programs, this insurance plan gives investors both insurance and investment under a single integrated plan. This plan is linked to the capital market and provides flexibility to invest in the equity or the debt funds. These products provide a risk cover for the policy holder along with the investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds.
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Establishment of the ULIP Organization
The first ULIP was launched by Unit Trust of India (UTI). The Government of India has opened up this insurance sector to the foreign investors in the year 2001. Later in the year 2005, several insurance companies started adopting the ULIP Plans. This led to the over abundance use of the ULIP Schemes.
The main objective of this plan is to provide investment to those who are seeking to invest in an investment cum insurance product.
Working Principle of ULIP
The ULIP organization is a mixture of both insurances as well as investment. A portion of the premium paid is put to use so as to provide an insurance cover to the policy cover whereas the other remaining portion is used in various equities and debt schemes.
The money that is collected by the insurance provider is collected and used to form a fund that can be used as an investment in various market instruments (debt and equity). The policy holders have an option to choose or select the fund plans according to their requirements. The functions are a lot similar to that of the mutual funds.
The ULIP Policy Holders are allowed with certain units and each unit carries a Net Asset Value (NAV) that is declared on a daily basis. The Net Asset Value is the value based on which the net rate of returns on ULIPs is determined. The Net Asset Value differs from one ULIP to another based on the market conditions and the performance record of the funds.
Features and Benefits of ULIP
The ULIP program offers quite attractive benefits to the customers and have distinct features.
Flexibility
The insurance part of the ULIPs is optional. An individual can choose to depend upon their financial capabilities.
After a certain period of time, the customer can change their premium amount. The customer can either increase or decrease depending upon their financial comfortability. Top-up facilities are also available for the customers who want to maximize their gain can invest in the additional amounts whenever they want.
Transparency
The ULIPs offers a high flexibility and provides policies up to a good extent. They offer various features like clear benefits, illustrative brochures so that the customers can get a brief idea about the planning and schemes before making an investment.
Tax Benefits
ULIPs not only provide protection and returns but also offer a tax exemption under the section 80C of the Income Tax Act. These Act mainly focuses on the life and health insurance plans. Under the section, 80D lies for the life insurance and the critical illness riders.
Death and Maturity Benefits
Following are the death and maturity benefits that are offered by the ULIPs. These benefits differ from one insurance company to another.
Death Benefits– If the policy holder experiences a forsaken death then Death Benefits are offered to the policy holder. The Death benefit is equal to the sum assured plus the fund value. The death benefits may vary depending on the cause of death. The nominee receives a death benefit which is equal to the higher sum of money assured by the insurance company.
Maturity Benefits– These benefits are offered to the policy holders if they survive beyond the maturity period. The maturity benefits are equal to the amount of the fund value.
Types of ULIP Plans
ULIPs are classified on the basis of their purpose
ULIP for Retirement
Retirement brings an end to your regular income. Therefore the ULIP plans give you the best out of it. These plans work on investing a small allowance of your income and at the end of your retirement program, the amount is automatically collected. After the end of the maturity period, you can withdraw the lump sum amount of money that is accumulated. Along with that, you receive regular payouts for the rest of your life.
ULIPs for Wealth Collection
This plan stacks up your wealth for a certain period of time. These plans are highly recommendable for those who are in their late 20s and early 30s. The benefit of this plan is that they can save the funds for their future purpose.
ULIPs for Children Education
This plan is meant for the future purpose of the children. This plan offers financial support for the expenses of child’s future which includes education, marriage etc.
ULIPs for Health Benefits
This plan offers financial benefits and support for different health issues and medical treatments.
Types of Funds that ULIP offer
The ULIP provides a wide variety of fund options so that the policy holder can invest in. These funds are classified as low-risk funds, medium-risk funds, and high-risk funds. Thus the funds that are offered by ULIP are
Cash Funds
Also called as the money market funds. These are the mutual funds that provide a safe and secure pathway to invest. These types of funds are basically low-risk and low return funds.
Balanced Funds
The Balanced funds are the combination of equity and fixed interest instruments. These funds combine safety with the capital appreciation. These maintain a balance in the stock and bond options resulting in the assured returns, and potential risks of equity investment. These are categorized as the medium- risk funds.
Income, Fixed Interest, and Bond Funds
These funds are generally invested in the corporate bonds, debt funds, government securities. This plan is mainly a combination of secured and unsecured investments. These plans provide the policy holders a moderate percentage in terms of returns. These types of funds are categorized as the high-risk funds.
Equity Funds
These types of funds are invested in the company stocks. These funds are aimed to generate capital appreciation and creating high-risk management.
ULIP Charges
The ULIPs has certain charges linked with them. These charges are classified into multiple categories. The following charges are
Premium Allocation Charges – These charges are imposed beforehand on the premium paid by the investor. These are the initial expenses that are acquired by the company for issuing the policy like the medical expenses.
Policy Administrative Charges– These charges are rebated regularly for the recovering the expenses by the insurance company to maintain the insurance policy.
Surrender Charges – This types of charges are levied in the case of premature withdrawal or partial withdrawal.
Mortality Charges – These charges work on the monthly basis that means it is charged on the monthly basis. It is for compensating an insurance company if the policy holder does not live to the assumed age. These charges differ on the basis of the lifestyle and the age of the policy holders.
Fund Management Charges – This charge is for the management of the fund. These charges are levied on the percentage of the value of the assets.
Fund Switching Charges – The ULIPs provides a flexibility in the fund charges. You can choose the fund option as well as switch between them in case if you want. If you are switching any fund then a fee is charged for it.
ULIP Risks
The term “Risk” means the amount by which the returns of an investment may increase or decrease from your expected value. The broader the gap, the more is the risk experience. Your investment time, surplus cash position and investment goal all determine the risk taking ability. The higher the expected return the more is the risk experience.
Though ULIP is an insurance tool but it is stuffed with risks to the capital market investments.
Market Experience– The ULIP organization has experienced a lot of ups and downs in the capital market. Whether it is an inconsistency in the equity market or the increase or decrease in the decline of the interest rates. Due to this instability, it affects the Net Asset Value.
Lack of Guarantee Returns– The returns in the ULIP are not guaranteed. The investment risk is high for the policy holder. The performance of the underlying fund and expertise of the fund manager determine the gains and losses of the investment.
Liquidity Risk– The ULIP insurance plan comes in a lock period of 3-4 years. Which results low in liquidity and you may lose out a certain percentage of your investment if you wish to redeem during the lock period.
High-Cost Structure– The charges of ULIP is quite high. The fee structure is high and it affects the returns on a ULIP.
Other risks are risky financial instruments, do not allow investment in surplus funds, offers low returns, Health and Accident Cover are not included in the ULIP etc.
Some of the best examples of the ULIPs in India in 2016
There are different, separate investment programs available in life insurance and mutual funds that help an individual to enjoy good returns, secured investment, and attractive tax savings. This is why investing in a combination product like ULIP is a simple and elegant way to enjoy the benefits of life cover and tax savings with a minimal risk of losses.