Its All About ULIPs

What is ULIP

ULIP stands for Unit Linked Insurance Policy. It’s a life insurance policy which provides the life risk cover with investment. The risk of capital markets is directly affect the performance of ULIPs. This risk of investment is borne by the investment.

How does it work?

The premium paid towards buying ULIP, is invested in a fund by buying units, whose value is declared through NAVs declared on end of every working day of the market.

Unit is, basically, a component of fund of ULIP.

ULIPs are popular for their link with funds, mostly the equity linked funds. As the capital markets gain strength, the NAV of the fund increases, but if the markets go down, the fund value or NAV of the fund decreases.

So, the investor adds the risk of capital markets to the risk of life by buying ULIP in expectation of heavy returns.

Guaranteed Returns?

The returns from ULIP may not be guaranteed. In these products, the risk of investment is borne by the policy holder. Investor gains or loses his fund value on the performance of the unit linked fund he has chosen. It is also to be noted that the past performance of the unit linked fund does not indicate the future performance.

Amount of premium allocated:

The full amount of premium paid is not invested in the unit linked fund. Insurer deducts various charges and fees and allocates the remaining portion of premium for investment in the fund. However, the allocated amount varies from product to product.

Thus, the value of the units purchased is less than the amount of premium paid because the fees and the charges are deducted from the premium paid by the policy holder and remaining amount is allocated for investment.

The charges fees and deductions

The structure of these charges differs with different insurers. The general deductions are:

Premium allocation Charge

These charges are deducted from premium towards allocations of the units under the policy. It is a specific percentage of the premium collected and is apart from the commission expenses.

Mortality charge

These are the charges which are deducted from the premium to provide for the cost of insurance coverage. This charge dependes on number of factors like age and health of the policy holder and amount of coverage etc.

Fund Management Fees

These are the fees levied on the funds and deducted before arriving at NAV (Net Asset Value).

Policy/ Administration Charges

These are the fees collected for administration of the plan and cancellation of the units. These may vary from policy to policy.

Surrender Charges

This charge is deducted for premature or partial or full encashment of units when applicable.

Fund switching charges

These charges are applicable when a policy holder wants to switch the linked fund. Sometimes, a limited  number of switches may be allowed each year without charge.

Service Tax Deduction

The applicable service tax amount is deducted from the premium before allotment of units.

Thus, the portion of premium after all these deductions and charges is used for purchasing the units.

Partial Encashment or Withdrawal:

The insurer provides the option of partial withdrawal. Wherein, the policy holder can withdraw a portion of the investment in the policy by cancelling a part of units.

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Refund of Premiums if not Satisfied with the Policy:

If policy holder doesn’t agree with the terms and conditions of the policy after purchasing it, he/she can seek the refund of the premiums within 15 days of receiving of policy document.

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

Additional Contribution above the Regular Premium:

Policy holder 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.

Information Related to Investments 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 about the product.