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 -
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Sum Assured or Fund Value, whichever is higher
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Sum assured + Fund Value
Points To Be Noted:
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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.
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If you make any withdrawals from the fund value and pass away after 2 years, that amount will be deducted from the Death Benefit.
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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?
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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.
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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.
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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.
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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.
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Allows Customizations
You can tailor the ULIP to your own needs and requirements -
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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.
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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
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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.
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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.