ULIPs: The Ideal Mix of Risk and Benefits.
ULIP plans are ideal for anyone who wants the benefits of a traditional insurance policy combined with the returns of a mutual fund policy.
Life insurance is a form of ensuring the financial security of your family. One of the most popular forms of insurance is the Unit Linked Insurance Plan (ULIP). Ulips are popular as they combine the protection of a traditional insurance policy and the high returns of a mutual fund. Simply explained they act as an investment and insurance at the same time. They are market-linked insurance plans.
The premiums collected from endowment policy holders are invested in risk free government securities and corporate papers whereas the premiums collected from ULIP investors are invested in the stock market, in addition to government securities and corporate bonds. The risks associated with ULIP because of investments in the stock market ensure that they offer better returns than any other insurance policy.
These plans have two parts –one portion of your premium is allocated to cover the insurance and the other portion is invested either in financial instruments. A portion of the total premium is held back by the insurance company as allocation charges, mortality charges and fund management fees.
The value of the ULIP is calculated using NAV (Net Asset Value) which depends on the performance of the assets acquired. On maturity the policy holder gets a lump sum, which consists of returns and the amount invested, as per the NAV at maturity.
Investors can pay the premiums as a one-time single payment or on an annual, half yearly, quarterly or monthly basis. Ulip plans also offer flexibility with regards to premium amounts.
The charges that a Unit Linked Insurance Plan levies on its customers are as follows:
1) Premium Allocation Charge: The main charge collected by any ULIP issuing insurance company. These are collected from a policy buyer before allocating his funds under various asset classes. This will be deducted initially from the premium, when you buy a ULIP.
2) Mortality Charges: are collected against insurance coverage and the amount collected varies based on age, health, amount insured and term of the policy.
3) Fund Management Fees: These fees are collected for managing the invested funds. These charges are deducted before arriving at the NAV of the policy.
4) Administration Charges: A charge collected for administration of funds and is collected on the redemption of units.
5) Fund Switching Charges: Some companies allow a minimum number of fund switches a year without cost but if these changes exceed the minimum number they will charge a fee for this.
6) Surrender Charges are charged for premature withdrawal of funds either partial or full. These charges are deducted before the payout to the investor.
7) Service Tax is charged as per current rules. They are covered under section 80C of the Income Tax Act.
Recently companies have launched specialized Unit Linked Plans that focus on retirement plans and on Children’s education. Both these plans have been well received in the market as people like to plan their future expenditure and take adequate measure to be able to pay their bills in the future. Health insurance Ulips which focus on taking care of your hospital bills rather than a death benefit are also available. They have ensured a level playing field for insurance companies in India.