Unit Linked Insurance Plan or ULIP is a unique financial product; it is a combination of insurance and investment rolled into one. It offers life insurance protection and secures your loved ones’ future against uncertainties and at the same time allows you to build a corpus for your future needs.
If you are a first-time insurance buyer, you may feel confused understanding the structure of ULIP and the various terms associated with it. However, you must understand the meaning and importance of these terms to comprehend the ULIP plan fully.
One of the most important terms associated with ULIP or any other insurance policy is premium. It is the amount you pay to the insurance company to keep your policy active. And, when you buy a ULIP plan, a part of the premium is used for offering life insurance. The remaining amount is used to invest in different assets to generate returns.
Most insurance companies give policyholders the flexibility to choose the premium payment terms – you can pay the premium monthly, quarterly, half-yearly or annually, depending on the investment mode you select.
In the event of your demise during the policy period, the insurance company will pay the death benefit to the nominee. This amount is called sum assured. When you purchase a ULIP plan, you must choose the sum assured carefully. It should be big enough to help your family meet their expenses for a few years after you are gone or at least till the dependent members become financially independent.
When the ULIP policy expires, you are entitled to receive a maturity benefit, including the returns earned from your investments. The amount you get is tax-free, subject to specific provisions of Section 10 (10D) of the Indian Income Tax Act, 1961.
Riders are additional coverage options that you can buy with ULIP by paying an additional premium. The riders are specially designed to help policyholders get coverage against specific risks not covered under the standard policy; it allows you to extend your policy’s coverage scope.
Some of the most common riders you can opt for are critical illness rider, accidental death benefit rider, premium waiver rider, etc.
A lock-in period refers to the time when you cannot withdraw funds. If you surrender your ULIP before the lock-in period of five years, the fund value is switched to a discontinuation fund. However, once you complete the five-year lock-in period, you can partially withdraw funds from your savings without incurring any penalty or withdrawal fees.
A significant portion of the premium you pay for ULIP goes towards investments in different assets. Over time, the investments will expand, and the fund value refers to the total worth of the invested funds. You can calculate the fund value by combining the number of fund units you hold by the NAV (net asset value) or the monetary value of each unit.
NAV – Net Asset Value
NAV is the value of a single unit of your investment in a ULIP.
There are many ULIP-related charges that the insurance company levy for the various services. The standard ULIP charges you must pay include premium allocation, mortality, policy administration, fund management, etc.
ULIP is an excellent investment option for all; it allows you to invest a small amount periodically in different assets to suit your specific needs and build a corpus over time. All this while getting insurance protection and tax benefits.