Everything to Know About Unit Linked Insurance Plans

Today, Indian investors are slowly moving away from traditional investment instruments to newer tools like mutual funds and ULIPs. ULIP is a unique instrument that offers the dual benefit of protection and opportunity to invest in the money market. Read on to know more about it.

What is ULIP?

ULIP or Unit Linked Insurance Plan is a unique investment instrument that is a combination of insurance and investment. The main objective of ULIP is to provide policyholders with a life cover as well as returns on their investment. In ULIP, the insurance company uses a portion of the premium you pay for protection, and the remaining amount is invested in different funds. You can choose to invest in the funds of your choice based on your risk appetite and long-term investment goals. Based on your choice, the money is invested in either equities or debt funds.

 How does ULIP work?

When you invest in a unit linked insurance plan, the insurer invests a part of the premium into different tools like company shares and bonds, PPF (public provident fund), debt funds and equities. The insurance companies have specialised fund managers. You can be sure that your money is invested wisely to suit your financial goals. Also, with fund managers regularly monitoring the performance of different funds, you need not go through the hassles of tracking the investment.

A significant advantage of investing in ULIP is that it allows you to switch your portfolio between equities and debt funds at any time during the policy term. This flexibility is a great boon for all investors as it allows them to take advantage of the best performing funds and increase their returns.

 What is the minimum lock-in period of unit linked insurance plan?

When the ULIP was first introduced in the Indian market, the minimum lock-in period was three years. But, later in 2010, the IRDAI (Insurance Regulatory and Development Authority of India), introduced many amendments and one of them was to increase the lock-in period to five years. Several experts suggest that insurance being a long-term investment product, you may not get maximum benefits of the policy unless you stay invested for a longer-term. Hence, you should choose a longer-term and remain invested for about 10 to 15 years.

Fees associated with investing in unit linked insurance plan

Just like any other investment tool, there are certain charges associated with ULIP, which are:

  • Allocation charges

The insurance companies deduct a fixed percentage from the premium amount during the initial years of the policy for allocation of the premium. The fee includes the initial and renewal expenses as well as intermediary commission expenses.

  • Mortality charges

The mortality charge is deducted every month, and it depends on many factors like the age, and sum assured. The charge is levied to provide for the insurance cover.

  • Fund management charges

The insurance companies charge a certain fee for managing the funds in the ULIP. It is deducted before the NAV (net asset value) is calculated, and the maximum amount the insurance company can charge is 1.35% of the fund value.

  • Policy administration charges

This charge is levied for the overall administration of the policy and it is charged on a fixed rate basis or as a percentage of the premium.

  • Partial withdrawal charges

ULIPs gives you the option to withdraw the funds partially; however, when you withdraw, insurance companies charge a fee on a per-transaction basis.

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