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Unit Linked Insurance Plans (ULIPs)

‘Save half of what you make’ - it’s something our elders have always advised us to do. But these are trying times, with retail inflation rising off the charts, and saving money in the bank not being enough anymore. The uncertain global situation has highlighted the importance of investing in the right place. And the uncertainty of life has time and again reminded us how invaluable insurance is.

Enter Unit Linked Insurance Plans

An effective blend of the two components that help us and our loved ones stay financially afloat.

Best ULIP Plans in India

What Is A Unit Linked Insurance Plan?

A ULIP is a product that offers you an opportunity to invest in market instruments to fulfil your long-term goals. Along with that, it also provides you with a life insurance cover so your dependents stay protected even in your absence.

Just like every other plan, you pay premiums to buy a ULIP.

  • One portion of the premium is used to provide the life insurance cover, and

  • The remaining amount is invested.

Let’s understand both of its components, step by step.

I. The Investment Component Of A ULIP

ULIP is the only type of life insurance plan that lets you invest in the stock market. Therefore, its returns are not fixed, but ‘linked’ to the performance of the stock market.

What Happens When You Invest In A ULIP?

  • The premiums paid by you and other policyholders are pooled together in a market fund.
  • Each market fund is managed by professionals called Fund Managers , who help in maximising the returns.
  • You can choose the asset class and invest in them - based on the market conditions, your risk tolerance, and return expectations.

Types of Asset Classes

Equity Instruments
  • Here, the premium you pay is invested in the equity or stock market. These funds can offer you a really high return over an investment period.
  • However, please note that they subject you to a higher risk, and are extremely volatile.
Debt Instruments
  • Here, the premium is invested in debt instruments, like - corporate bonds, government securities, and other low-risk investment tools.
  • Debt instruments usually generate fixed returns. Hence, they are considered much safer than equity investments.
Money-Market Instruments
  • Here, the premium is invested in short-term money market instruments, like - commercial papers, bank deposits, treasury bills, etc.
  • They are a type of debt fund that possesses high liquidity and are also known as Cash Fund or Liquidity Fund. You can expect good returns here.
  • The average maturity of a money market fund is 1 year, whereas the average maturity of a debt market instrument could be longer, say 5 years.

What Happens After You Have Invested In A ULIP?

  • The invested money gets converted into units based on the NAV of the fund on that particular day, after deducting charges

    NAV or Net Asset Value is the market value of the fund you are investing in on the date of the investment. It is variable in nature and changes every day.

Number of units = (Invested Money - Charges) / Net Asset Value

For example, Ritwick buys a ULIP on 1st July 2022. He pays a premium of Rs. 50,000. Let’s assume that the NAV on the day of his purchase was Rs. 100. Now, after the charges applicable on the ULIP (explained later), Rs. 45,000 is ready to be invested into the fund.

Therefore, the total units he received

= (Invested Money - Charges)/Net Asset Value

= 45,000/100

= 450 units

  • NAV changes every day, and so does the Fund Value

    NAV is simply the market value of a single unit on a particular day. And the Fund Value is the market value of the total number of units you own with the insurance company on a particular day.

    Due to the fact that the NAV is solely dependent on the market conditions and changes every day, the fund value of your investment also changes every day.

Fund Value = NAV x Number of Units

Let’s take Ritwick’s example again. He owns 450 units. Assuming that the NAV on 15th July, 2022 was Rs. 1000 -

Fund Value = NAV x Number of Units

= 1000 x 450

= Rs. 4,50,000

What Are The Charges Applied To ULIPs?

To manage the fund, the insurance company will deduct certain ‘charges’ from the premium you pay. And then invest the rest.

  • Premium Allocation Charges

    When an insurer issues the ULIP, there are several initial expenses that they incur. Expenses, like - the cost of underwriting the policy, medical tests, agent’s commission charges, etc. - are deducted from the premium you pay through the Premium Allocation Charge.

  • Policy Administration Charges

    As the name suggests, this charge is deducted by the insurer at the start of every month for administering or maintaining your policy. They cancel some units proportionately from each of the funds selected by you.

  • Fund Management Charges

    It’s imposed by the insurance company for managing your funds. It’s charged as a percentage of the fund’s value and is deducted before calculating the NAV (Net Asset Value) of the fund. The Fund Management Charge is adjusted from NAV on a day-to-day basis.

  • Fund Switching Charge

    As discussed before, during policy purchase, insurers allow you to choose a fund as per the risk you want to take, and the financial goals you want to achieve. If the fund you selected is not performing up to your expectations, you can move your money to a fund that may get you better returns. This is called fund switching. And the charge applied on fund switches is known as Fund Switching Charge.

  • Surrender or Discontinuance Charge

    ULIPs come with a lock-in period of five years and you cannot withdraw any funds during this period. But suppose, you choose to stop paying the premiums and discontinue the policy within the lock-in period. In that case, your money will be transferred from your current fund to a Discontinuance Policy Fund. But before transferring, the insurer will deduct a Discontinuance Charge as a percentage of the fund value or as a percentage of the premium.

Now that we have covered the investment component, let’s talk about the second part -

II. The Insurance Component Of ULIP

In case you pass away during the policy term, your nominee will receive a Death Benefit. The money will act like a safety cushion, help them achieve their short and long-term goals, and also pay off any pending loans/liabilities. The insurance component makes sure your family gets to live a comfortable life, even in your absence.

The Death Benefit can be either -

  • Sum Assured or Fund Value, whichever is higher
  • Sum assured + Fund Value
Points To Be Noted:
  • In ULIPs, the Sum Assured is usually 10 times the annual premiums paid. Depending on the product, it could also be another multiple, say 15 times or 20 times the premium.
  • If you make any withdrawals from the fund value and pass away after 2 years, that amount will be deducted from the Death Benefit.
  • Mortality Charges will be levied by the insurer for providing an insurance cover to you. It will vary across individuals because they depend on a variety of factors, like age, gender, etc. Also, it is deducted on a monthly basis, proportionately from your chosen fund by redemption of units.

What Are The Benefits Given By A ULIP?

  • Maturity Benefit (i.e. Investment Returns)

    In case you survive the policy term, you shall receive a Maturity Benefit. It is equal to the Fund Value as calculated on the policy maturity date.

  • Death Benefit

    In case you do not survive the policy term, your nominee shall receive a Death Benefit, equal to either -

    Sum Assured or Fund Value, whichever is higher

    Sum assured + Fund Value

Let’s understand this better - with the help of an example.

Namrata purchases a ULIP for which she has to pay an annual premium of Rs. 2,10,000 for the next 20 years. She, unfortunately, passes away during the policy term. Now, the death benefit will be paid out to her husband, who is the appointed nominee.

Assuming that the NAV on the date of purchase was Rs. 400, and after deducting the charges Rs. 2 lakhs were invested -

Hence, the number of units owned by Namrata

= 2,00,000/400

= 500

Now, let’s see how the death benefit will work.

Situation #I The death benefit is either the sum assured or the fund value, whichever is higher,

Let’s assume that the sum assured is 10 times the annual premium. So in this case -

Sum Assured = 10 x Annual Premium

= 10 x 2,00,000

= Rs. 20,00,000

Note that the fund value is calculated based on the NAV and the accumulated units. Let’s assume that her plan accumulates an additional 2000 units till the date of her death.

Therefore, the total accumulated units = 500 + 2000 = 2500

Let’s assume that the NAV on the date of her passing away is Rs. 500.

So the Fund Value on that date

= NAV x Owned Units

= 500 x 2500

= Rs. 12,50,000

Now, since the Sum Assured (Rs. 20 lakhs) is higher than the Fund Value (12.5 lakhs) at the time of Namrata’s death, her husband will receive a Death Benefit of Rs. 20 lakhs.

Situation #II The death benefit is the sum assured + the fund value

As we just calculated, the Sum Assured is Rs. 20 Lakhs and the Fund Value is Rs. 12.5 lakhs.

So Death Benefit = Sum Assured + Fund Value

= Rs. (20,00,000 + 12,50,000)

= Rs. 32,50,000

Therefore, Namrata’s husband is eligible to receive Rs. 32.5 lakhs as the Death Benefit.

  • Option Of Partial Withdrawal

    As discussed before, when you buy a ULIP and keep paying the premiums regularly, a fund value begins to accrue. You get the option of withdrawing a portion of the fund value that has accrued over time.

    However, there is a 5-year lock-in period for these plans. So once you purchase a ULIP, this fund value cannot be withdrawn or liquidated for a period of five years. After this period ends, you can begin making partial withdrawals, for any need you may have. For example, to pay for emergency hospitalizations or pay off EMIs.

  • Funds Can Be Switched

    Market conditions are volatile and hence, they can affect the performance of funds. If your funds perform badly, you can switch your money to a fund that is better aligned with your financial goals - on the basis of your risk appetite and return expectations.

    Please Note that your existing fund value shifts to another fund. But any new premiums added will be invested in the fund you picked during the policy purchase.

  • Allows Customizations

    You can tailor the ULIP to your own needs and requirements -

  • Premium Payment Term

    You can select the premium payment term based on your convenience and financial situation. You get the following options -

    Limited Pay: You can choose to pay all your premiums in larger and faster instalments while remaining covered until the end of your policy duration.

    Single Pay: You can pay off your premiums in one go, and enjoy a cover till the end of the policy term.

    Regular Pay: You can pay the premiums according to the policy schedule, i.e., till the end of the policy term.

  • Premium Payment Frequency

    You can customise how frequently you want to pay your policy premiums. There are four options available -

    Accidental Death Benefit Rider

    Semi-annual payment option

    Quarterly payment option

    Monthly payment option

  • Riders

    ULIPs also come with Riders, which are optional add-ons. They are specifically designed to widen your policy's coverage. A rider can be purchased by paying an additional fee.

    There are 3 types of riders available with Unit Linked Insurance Policies -

    Accidental Death Benefit Rider

    Waiver of Premium due to Critical Illness Rider

    Waiver of Premium due to Accidental Disability Rider

Note: There may be more riders available, depending on the product.

  • Provides Tax Benefits

    Tax benefits are available on the premium you pay every year under Section 80C of the Income Tax Act, 1961. And, under Section 10(10D), you can avail of tax exemptions on the withdrawals you make, and the returns you or your nominee receive.

A Detailed Framework For Buying A ULIP

  • Eligibility

    Various factors that determine if you’re eligible to buy a ULIP are -

  • Age

    Minimum Entry Age: 30 days or 18 years, depending on the product.

    Maximum Entry Age: Generally 60 or 65 years. It can vary and range from 45 to 70 years, depending on the product and premium payment term.

  • Income

    Before the insurer issues your policy, you may be required to submit your income proof. This is called the financial underwriting process and is done to confirm if you will be able to pay the premiums till your premium payment term. The minimum income criteria may vary based on the products, insurers, and the amount you plan to invest.

  • Minimum And Maximum Premium

    Minimum Annual Premium Criteria: This can be as low as Rs. 10,000-15,000 per annum, or as high as Rs. 1-2 Lakhs per annum, depending on the product, premium payment term or premium payment frequency that you choose.

    Maximum Annual Premium Criteria: Can be Rs. 2 Lakhs, 4 Lakhs, 6 Lakhs, etc. Most new-age ULIPs do not have any specific maximum limit.

  • Minimum And Maximum Policy Term

    Minimum Policy Term: This can be as low as 5 years or 10 years, depending on the product.

    Maximum Policy Term: This can be 20-50 years or even more, depending on the product. Some products, like Whole Life ULIPs, may have a maximum policy term of 99 years.

  • Minimum Lock-In Period

    Once you start investing in a ULIP, a lock-in period of 5 years gets activated. This means during the initial 5 years of your policy period, you cannot access and withdraw the fund value of your policy. You can make withdrawals only after the lock-in period gets over.

  • Premium Payment Term

    As mentioned earlier, you can choose how you want to pay the premiums -

    At once (Single Pay)

    For a limited duration, say 5 years or 10 years (Limited Pay)

    Till the end of the policy term (Regular pay).

What Happens If You Stop Paying Premiums For A ULIP?

To keep a ULIP running, you need to pay the premiums till the end of the premium payment term. But there may be several reasons that may make you unable to pay it. You may be experiencing a financial crisis, or the plan may no longer fit your financial needs. In such cases, you can stop paying. However, here are the consequences you need to know about -

  • If You Stop Paying Premiums During The Lock-In Period

    The surrender or discontinuance charges will be deducted from your fund value. The remaining fund value will be shifted to a Discontinued Policy Fund.

    The insurance cover, if any, will stop immediately.

    You can choose to revive or surrender your policy. If you surrender it, you receive the Discontinued Policy Fund Value - the fund value on the day of discontinuance with interest.

  • If You Stop Paying Premiums After The Lock-In Period

    In this case, your plan will convert to a reduced paid-up policy. This means the Sum Assured will be reduced in proportion to the number of premiums you have paid to the total number of premiums payable during the policy term.

    You can choose to revive or completely withdraw your policy. If you don’t, your policy continues on a reduced paid-up basis.

Now, let’s understand ULIP, its components and its benefits better - by taking an example.

Pawan, a 40-year-old, bought a ULIP in May 2022, for a period of 25 years. He will be required to pay an annual premium of Rs 1.00,000. Let’s assume that the insurer deducted Rs. 6000 as charges. Hence, the amount to be invested per year is Rs. 94,000.

He needs a good amount for his son’s higher education and will require the cover amount for the same. He has appointed his wife, Priti, as the nominee. The Death Benefit will provide enough funds to meet his son’s goal.

His policy states that the Death Benefit will either be the Sum Assured or the Fund Value on the day of his death, whichever is higher.

So let’s see how the ULIP works.

Assuming that the Net Asset Value of the units was Rs. 500 on the date of policy purchase -

Total Units = (Amount Invested - Charges)/Net Asset Value

= 94,000/500

= 188

  • If Pawan Survives The Policy Term -

    Let’s say he accumulates another 1500 units from the premiums he invests over the 25-year policy term.

    So the total units accumulated till 2046 = 188 + 1500 = 1688 units

    The maturity benefit will be equal to the fund value as calculated on the date of the policy maturity.

    Let’s assume that the NAV on the policy maturity date is Rs 600.

    Therefore, Maturity Benefit

    = NAV x Owned Units

    = Rs. (600 x 1688)

    = Rs. 10,12,800

    So Pawan is eligible to receive Rs. 10,12,800 as the maturity amount in 2046, if he survives the policy term. Once it is paid out to him, the policy will terminate.

  • If Pawan Passes Away During The Policy Term -

    As mentioned, the death benefit may be either the sum assured or the fund value, whichever is higher.

    Let’s assume the sum assured is 10 times the annual premium.

    So in this case -

    Sum Assured = 10 x Annual Premium

    = Rs. (10 x 1,00,000)

    = Rs. 10,00,000

    The fund value is calculated on the basis of the NAV and the accumulated units. Let’s assume that the NAV on the date of his passing away is Rs. 500, and he accumulates another 900 units from the premiums he invests till the date of his death.

    Total units accumulated = 900 + 188 = 1088

    So Fund Value on that date

    = NAV x Owned Units

    = 500 x 1088

    = Rs. 5,44,000

    Therefore, since the Sum Assured (Rs. 10,00,000) is higher than the Fund Value (Rs. 5,44,000), his wife, Priti, will receive a Death Benefit of Rs. 10,00,000.

Wrapping Up!

There are so many investment options and opportunities available today, that it becomes quite tough to pick the right one for yourself. ULIP is a great option if you want high returns, along with a small life cover. Make sure its benefits and features are aligned with your needs and future goals before you purchase it for yourself. We hope this article will help you make a good decision today!

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