What is ULIP?
Whatever the insurance plan is, the ultimate of buying the policy is to protect the family members from unforeseen future events. Among so many insurance policies, one is ULIP which is a multi-facet instrument and modern form of insurance plan which offers insurance coverage as well as investment exposure in bonds, equities, or a combination of both. Thus, ULIP creates more worth for investors. Read more here – What is ULIP?
How does ULIP work?
A Unit-linked insurance plan (ULIP) is an exclusive product, its working is different from other financial and investment instruments. From the insured point of view, it is a plan in which the policyholder pays a fixed premium for a specific coverage amount. The premium is divided into two parts, out of which one portion goes for insurance and provides insurance coverage. In contrast, the other portion is invested in the fund of the policyholder’s choice. That fund could be equity, debt, or a combination of both kinds of funds. Additionally, the policyholder has the option to switch the investment plan at any point of time during the course of the premium payment.
From the insurer’s perspective, ULIP means pooling money from various policyholders. The insurer pools the money and invests it into the funds chosen by the policyholders. Once the money is pooled, the entire corpus is categorized into ‘units’ with a particular face value. The insurer allocates the ‘units’ to each investor according to the proportion of their investment. The value of each unit is known as ‘Net Asset Value’ or ‘NAV.’ The ups and downs in the assets’ value directly impact the net asset value. This is how the unit-linked insurance plan (ULIP) plan works.
The ULIP plan works with great flexibility and offers the policyholder to partially withdraw the amount from the corpus. In such cases, the corresponding number of units is sold. Although, some units are deducted as charges for the withdrawal.
It also gives the flexibility to the policyholder to adjust the fund according to their financial needs and preferences throughout their investment tenure. For example, one can switch between stock, bond, or balanced funds according to their investment requirements.
More about ULIP and how ULIP plan works
Since ULIP is created to accommodate long-term investment goals, it supports wealth building. ULIP is a great instrument offering more significant returns than any conventional insurance plan. Thus, a person can invest to achieve any of the life goals. When it comes to premiums, the policyholder can either make a single, lump-sum payment or periodic payments payable on a monthly, quarterly, twice-a-year, or annual basis.
Charges
The insurer is serving you by investing your money to grow it. It keeps an eye on the trend of the market and updates you regularly updates you about the same and the status of your investment. It suggests you switch the fund as per the market fluctuations by matching it with your risk appetite, sending you a financial report of your fund from time to time, and for all such services, it charges a nominal fee from the policyholder. When planning to invest in ULIP, one must consider the fund manager’s charges for providing the services. Following are the costs that you must consider before investing in ULIPS
- Premium allocation charges
- Policy administration charges
- Fund management charges
- Mortality charges
- Partial withdrawal charges
- Fund switching charges
ULIP investment plan based on the purpose
ULIP investment should always serve a purpose and must be based on the goal. For example – if the investment purpose is for retirement, then you must begin to invest at the early ages of your employment and should pay the premium during the entire tenure of the job.
Conclusion
ULIP outperforms the other financial instrument because it serves the dual purpose of life cover and investment. Thus, it serves as an appropriate way to enter the market and generate benefits with the help of professionals and experts. The involvement of an expert reduces the chances of risk. At the same time, tax exemption, flexibility in premium payment, and withdrawal of the amount during any contingency enhance the benefits of ULIP by making it an attractive instrument for investment.
