ULIPs – many of us have heard of this term and want to learn more about it but have been unable to get the proper information as to what ULIP is all about, who regulates them (there is a conflict between IRDA and SEBI as who is going to regulate ULIP)
What are ULIPs (Unit Linked Insurance Policies)?
ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. (Remember that in a Unit Policy, the investment risk is generally borne by the investor.)
In other words we can say that it is a goal-based financial solution that combines the safety of insurance protection with wealth creation opportunities.
How the ULIP works?
In ULIPs, a part of the investment goes towards providing you life cover. The residual portion of the ULIP is invested in a Unit fund which in turn invests in stocks or bonds; the value of investments alters with the performance of the underlying fund opted by you.
What is a Unit Fund?
The allocated (invested) portions of the premiums after deducting all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund.
What is Unit?
It is a component of the Fund in a Unit Linked Policy. (It is almost same as that of Mutual Fund).
What Types of Funds does ULIP Offer?
Most insurers offer a wide range of funds to suit one’s goals:
- Investment objectives
- Risk profile
- Time horizons.
The following are some of the common types of funds available along with an indication of their risk characteristics:
|General Description||Nature of Investments||Risk Category|
|Equity Funds||Primarily invested in company stocks with the general aim of capital appreciation||Medium to high|
|Income, Fixed Interest and Bond Funds||Invested in corporate bonds, government securities and other fixed income instruments||Medium|
|Cash Funds||Sometimes known as Money Market Funds â€” invested in cash, bank deposits and money market instruments||Low|
|Balanced Funds||Combining equity investment with fixed interest instruments||Medium|
Investment returns Guaranteed in ULIP?
One of the reasons people find to stay from ULIP is that, investment returns are not guaranteed in a ULIP. The investment risk of the portfolio is borne by the policy holder. Depending upon the performance of the unit fund chosen, the policyholder may incur gain or loss on his investment.
The Charges in ULIP?
ULIP which are offered by different insurer have different charge structures, following are the different types of fees and charge :
Premium allocation Charge
This charge normally includes initial and renewal expenses apart from commission expenses. It is basically a percentage of premium appropriated towards charge before allocation the units under the policy.
This is the charge to provide the cost of insurance cover under the plan. It also depends upon the age of member, heath, and amount of coverage.
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 Charge
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.
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.
How much of the premium is used to purchase units?
As I mentioned above, 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.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 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.
Basic Terms Used:
Free Look Period: The policyholder can seek the refund of premiums if he disagrees with the terms and condition of the policy, within 15 days of the receipt of the policy document. The policyholder shall be refunded the fund value including the charges levied through cancellation of units subject to a deduction of expenses towards medical examination, stamp duty, proportionate risk premium for the period of cover.
Top up: 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 â€œTOP UPâ€ facility.
Switch: This 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.
Partial Withdrawal: This option facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.
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
- policy lapse and its consequences
- Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council
At last, the information which is provided by the insurer to the insured consist of following:
- 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
Author Disclaimer: The above material is provided for general information only and does not constitute legal or other professional advice.