A ULIP is a life Insurance plan which provides a mixture of insurance and investment. (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. It has revolutionized Indian insurance industry. Some years back, almost all insurance plans sold in India were endowment plans. However, after private players entered into the industry and stock market boomed, ULIPs displaced endowment from its top position.
In case of ULIP’S, .Investment gains (profits) are distributed to policyholders in the form of a bonus announced every year. ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings,
The insurance company credits the premium to a common pool called the ‘life fund,’ after setting aside funds for the risk premium on life insurance and management expenses. Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The surplus in the life fund left after meeting these liabilities is credited to policyholders’ accounts in the form of a bonus. In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges.
The rest of the premium is used to invest in a fund that invests money in stocks or bonds. The policyholder’s share in the fund is represented by the number of units. The value of the unit is determined by the total value of all the investments made by the fund divided by the number of units.
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Mostly insurance company offers a range of funds; the insured can direct the company to invest in the fund of his choice. Insurers usually offer three choices — an equity (growth) fund, balanced fund and a fund which invests in bonds. In both ‘with profits’ policies as well as unit-linked policies, a large part of the first year premium goes towards paying the agents’ commissions. In ULIPs, the investment risk is borne by the policy holder and hence returns are not guaranteed. The dynamics of the capital/stock market have a direct bearing on the performance of the ULIPs.
Under this policy the insurer allocates the total premium into various units. The insured is also given the opportunity to choose the option of investment units. Most of them prefer to allocate them in financial investments and assets. The number of units they choose on each option differs from individual to individual. Some of them may choose to invest more on properties while the rest prefer to invest more on financial instruments such as shares, debentures, etc.
Likewise the insurer takes care to allocate a unit of the premium for insurance maintenance and the ancillary expenses. The insured will have no choice over this. The insured is also excused from paying income tax for the amount received from the company. However this policy does not guarantee profits like the previous and is therefore risky as far as returns are concerned. ULIPs fundamentally work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, debentures, corporate bonds and government securities. Investments in ULIPs help to gain tax benefits under Section 80C.
To understand more about ULIP’S, call us on 022 6181 6111
What is the benefit payable on the maturity of the policy?The value of the fund units with bonuses, if any is payable on maturity of the policy.
What should one verify before signing the proposal?One has to verify the approved sales brochure for . All the charges deductible under the policy . Payment on premature surrender . Features and benefits . Limitations and exclusions . Lapsation and its consequences . Other disclosures
What are charges incurred in a ULIP?Any ULIP has four major charges: Premium Allocation charges, Fund management charges, Policy Administration charges and mortality charges. Apart from these, there could be charges for switching, premium redirection, partial withdrawal, service requests etc depending on the life insurance plan.
Can one seek refund of premiums if not satisfied with the policy, after purchasing it?The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period).
Does ULIP offers guaranteed returns?The returns are not guaranteed in a ULIP. ULIP is market linked and any risks associated with the ULIP are borne by policyholder.
How much of the premium is used to purchase units?The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining, after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product and year to year. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units. Want to know more about the charges levied on Ulips? Then call us on 080 67974000
Is it possible to invest additional contribution above the regular premium?Yes, one can invest additional contribution over and above the regular premiums as per their choice subject to the feature being available in the product. This facility is known as 'TOP UP' facility. A part of the top up will be invested into the market while a small portion will be used to enhance the risk cover in the policy.
Whether one can switch the investment fund after taking a ULIP policy? Yes. 'SWITCH' option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number.
Can a partial encashment/withdrawal be made?Yes, Products may have the "Partial Withdrawal" option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of the units. To know more on ULIP plans, call us on 080 67974000
What information related to investments is provided by the Insurer to the policyholder?The Insurers are obliged to send an annual report, covering the fund performance during previous financial year in relation to the economic scenario, market developments etc. which should include fund performance analysis, investment portfolio of the fund, investment strategies and risk control measures adopted.
What happens if payment of premiums is discontinued?a) Discontinuance within three years of commencement – If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later. b) Discontinuance after three years of commencement - At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount equivalent to one full year’s premium, the contract shall be terminated by paying the fund value. c) Policies having 5 year lock-in-period: For policies bought on or after 01-09-2010, lock in period has been increased to 5 years. Upon discontinuance of the payment of premium, the policyholder has the option of (i) Reviving the policy or (ii) Complete withdrawal without any risk cover. A notice shall be sent by the insurer giving the above options, within 15 days from the date of expiry of grace period, if no option or option (ii) is exercised within 30 days of such notice, the proceeds of discontinued policy shall be refunded but not before the completion of the lock-in period. If such discontinuance is within lock in period, the policyholder shall have the right to revive the policy within a period of two years from the date of discontinuance but not later than the expiry of the lock-in period.
Can a partial encashment or withdrawal be made?Yes, Products may have the “Partial Withdrawal” option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.
Can one switch the investment fund after taking a ULIP policy?Yes. “SWITCH” option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number.
Is it possible to invest additional contribution above the regular premium?Yes, one can invest additional contribution over and above the regular premiums as per their choice subject to the feature being available in the product. This facility is known as “TOP UP” facility.
What is the benefit payable in the event of risk occurring during the term of the policy?The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the event of risk to the life assured during the term as per the policy conditions.
What is the benefit payable on the maturity of the policy?The value of the fund units with bonuses, if any is payable on maturity of the policy.
What is Net Asset Value (NAV)?NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers.
Can one seek refund of premiums if not satisfied with the policy, after purchasing it?The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.
How much of the premium is used to purchase units?The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units.
What should one verify before signing the proposal?One has to verify the approved sales brochure for • all the charges deductible under the policy • payment on premature surrender • features and benefits • limitations and exclusions • lapsation and its consequences • other disclosures • Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council.
What are the Charges, fees and deductions in a ULIP?ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time. Premium Allocation Charge : This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses. Mortality Charges : These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc. Fund Management Fees : These are fees levied for management of the fund(s) 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 cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate. Surrender Charges : A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions. Fund Switching Charge : Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. Service Tax Deductions : Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.
Are Investment Returns Guaranteed in a ULIP?Investment returns from ULIP may not be guaranteed.” In unit linked products/policies, the investment risk in investment portfolio is borne by the policy holder”. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.
What is a Unit Fund?The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policyholders are pooled together to form a Unit fund.
What is a Unit?It is a component of the Fund in a Unit Linked Policy.
What Types of Funds do ULIP Offer?Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics. - Equity Funds : Primarily invested in company stocks with the general aim of capital appreciation. - Income, Fixed Interest and Bond Funds : Invested in corporate bonds, government securities and other fixed income instruments. - Cash Funds : Sometimes known as Money Market Funds — invested in cash, bank deposits and money market instruments. - Balanced Funds : Combining equity investment with fixed interest instruments.
How is Surrender value calculated in Unit Linked Policies?Surrender value in Unit Linked Policies is usually expressed as fund value less the surrender charge.
What is the method of arriving at NAV for surrenders, maturity claim, switch etc?In respect of valid applications received (e.g. surrender, maturity claim, switch etc) up to 3.00 p.m. by the insurer, the same day’s closing NAV is applicable. In respect of valid applications received (e.g. surrender, maturity claim, switch etc) after 3.00 p.m. by the insurer, the closing NAV of the next business day is applicable.
