What is a unit-linked insurance plan? / ULIP meaning
A unit-linked insurance plan (or ULIPs) can be understood to be a crossbred product that provides its policyholder with insurance coverage in addition to providing them with an investment plan. In addition to providing policyholders with life insurance coverage, ULIPs also give them the opportunity to invest in a number of investments that may range from equity to debt instruments. Companies that provide these unit-linked insurance plans ordinarily pool the premiums of several policyholders together and then make these investments akin to the way in which mutual funds operate.
The value of these plans lies in the fact that they allow policyholders to fulfil long-standing financial goals which include funding their children’s education and buying a home in addition to several other goals.
How do unit-linked insurance plan funds work?
Companies that provide ULIPs collect premiums paid by all those who subscribe to said ULIPs. They then invest this money in a fund that has been chosen by the policyholders. The total money invested is then divided into units each of which has been allocated with a certain face value. Policyholders are provided with units that correspond to the amount they invested in the plan. In order to better understand the value of a unit, policyholders are instructed to consider the Net Asset Value (or NAV) of the same. Changes that cause the underlying assets to rise or fall in value cause a corresponding change in the value of the ULIP NAV.
Terms and conditions pertaining to the ULIP may allow for policyholders to partially withdraw their money from the fund after the expiry of specified lock-in period, in which case units equivalent in value to the amount they want to be withdrawn are sold.
Policy charges can be deducted in the form of units should they be applicable.
How to calculate the total ULIP fund’s value
ULIP calculators serve as nifty tools which allow investors to know the estimated amount by which their investments will mature. They are based on anticipated future investment values and returns. ULIP calculators are designed to allow for comparison between multiple ULIP policies. These comparisons are made on the basis of the return provided.
In order to remove the confusion that might exist between sum assured and fund value, they have been defined below –
- Sum assured refers to the money paid to the policyholder’s beneficiary/ nominee in the event of death of the life assured.
- Fund value refers to the net asset value (or NAV) on a given day multiplied by the number of units owned.
Policyholders are entitled to invest in a range of funds that are outlined by the company. They may choose their investments on the basis of their risk appetite and the prevailing market conditions.
In order to arrive at an understanding of the total ULIP funds value, policyholders need to multiply the net asset value of each unit on a given day by the number of units owned by them.
Benefits of investing in ULIP funds
There exist a number of benefits associated with investing in ULIP funds some of which have been mentioned below –
- Policyholders are entitled to enormous flexibility – By investing in a ULIP, policyholders have so many options within which to work.
- They are entitled to choose the fund of their choice which may range from equity and debt or a combination of both. Each policyholder’s risk appetite is therefore taken into account.
- Furthermore, policyholders may alter the sum assured when the policy begins, depending on the terms and conditions of the policy. Sum assured here refers to the minimum amount that their beneficiary/ nominee receives in the event that they die.
- The premium amount invested in by the policyholder may also be altered with the aid of a top-up which policyholders can pay as it allows them to help maximize the returns on their investment.
- Customization is possible with the option of riders which may be added to the plan and add a layer of protection at a nominal extra cost. This is because the life coverage amount increases with the aid of these riders.
- Transparency is always provided - Policyholders have access to a number of sources via which they can assess the ULIP from an in-depth perspective. This may be done in the following ways.
- ULIPs allow prospective buyers a free-look period during which they can ascertain whether or not the plan is aligned with what they want. In the event policyholders are left feeling dissatisfied, they are entitled to cancel the policy and will be issued a refund. This refund might feature applicable deductions.
- Product brochures provide policyholders as well as prospective buyers of the ULIP with a number of details pertaining to the plan. Facts mentioned here allow readers to have a thorough understanding of their investment.
- NAV updates are ordinarily regularly updated by the company issuing the ULIP. These updates are important as they indicate the performance of the ULIP fund.
- Life-long goals are a possibility with ULIPs – Major financial goals require ample amounts of savings. These expenses range from creating retirement funds to funding education for a child. ULIPs provide their policyholders with the ability to save by providing them with systematic investment opportunities spread across long periods of time.
- Tax benefits are plentiful under ULIP plans – Policyholders benefit from several tax benefits ranging from those applicable to their premium payments (under Section 80C and section 80D) along with maturity benefits which can be tax-free (under Section 10(10D) of Income-tax Act 1961, subject to the provisions stated therein.
Conclusion
You could say that ULIP investments is like hitting two targets with one stone. ULIPs may be considered as one of the preferred options to not only beat inflation but also the fears of market volatility. While looking out for a ULIP Policy, you could do a thorough research and make the final selection, accordingly, to ensure you achieve your life goals.
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