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What is a ULIP?

All you need to know about a ULIP

Frequently Asked Questions On ULIP Insurance Plans

Frequently Asked Questions on ULIPs (Unit Linked Insurance Plans)


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May 10, 2017

By : Bajaj Allianz Life

1. What is a ULIP?

ULIP stands for Unit-Linked Insurance Plan. ULIP is a life insurance solution that provides financial protection in case of uncertain events like death or accident as well as flexibility in investment.

The premium paid for a ULIP is allocated at a certain rate in a fund(s) as per the policyholder’s choice. The returns in a ULIP depend on the performance of the fund in the capital market. ULIP investors have the option of investing across various schemes, i.e. diversified equity funds, balanced funds, debt funds etc.

It is important to remember that in a ULIP, the investment risk is generally borne by the investor. Charges related to providing life cover, fund management, etc. are deducted from the fund during the course of the plan.

2. What is a Unit Fund?

These are the invested parts of the premiums after deduction of all the charges and premium for risk cover under all policies in a particular fund as chosen by the policyholders.

3. What is a Unit?

It is a component of the Fund in a ULIP Policy.

4. What Types of Fund Options do ULIPs Offer?

Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time duration. Different funds have different risk categories. They also exhibit different return potentials. 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

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)

Invested in cash, bank deposits and money market instruments

Low

Balanced Funds

Combining equity investment with fixed interest instruments

Medium

5. Are Investment Returns Guaranteed in a ULIP?

Investment returns from ULIP may “not be guaranteed”. In unit-linked products, the investment risk in investment portfolio is borne by the “policyholder”. Depending on the performance of the unit-linked fund(s) chosen; the policyholder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a ULIP fund are not necessarily indicative of the future performance of the fund.

6. What are the charges, fees and deductions in a ULIP?

ULIPs offered by different insurers have different charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time.

6.1 Premium Allocation Charge

This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses

6.2 Mortality Charges

These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, health status etc.

6.3 Fund Management Fees

These are fees charged for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV).

6.4 Policy/ Administration Charges

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.

6.5 Surrender Charges

A surrender charge may be levied in case premature partial or full encashment of units is opted for (wherever applicable), as mentioned in the policy conditions.

6.6 Fund Switching Charge

Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches getting subjected to a fund-switching charge.

6.7 Service Tax Deductions

Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

7. What should one verify before signing the proposal?

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
  • Lapsation and its consequences
  • Other disclosures.

8. How much of the premium is used to purchase units?

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. However the share of premium used to purchase units varies from product to product.

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.

9. Can one seek refund of premiums if he/she is not satisfied with the policy after purchasing it?

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document also known as the Free Look-in Period. The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.

10. 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.

11. What is the benefit payable in the event of risk occurring during the term of the policy?

The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the event of risk to the life assured during the term as per the policy conditions.

12. What is the benefit payable on the maturity of the policy?

The value of the fund units, is payable on maturity of the policy.

13. Is it possible to invest additional contribution above the regular premium?

Yes, there is a ‘Top-Up’ facility available, where one can invest additional contribution as per their choice.

14. Can you switch the investment fund after taking a ULIP policy?

Yes. There is an option “SWITCH” which provides for shifting the investments in a policy from one fund option to another provided the feature is available in the product.

While a specified number of switches are generally given free of cost, a fee is charged for switches made beyond that limit

15. Can a partial encashment/withdrawal be made?

Yes, some products have the “Partial Withdrawal” option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.

16. What happens if payment of premiums is discontinued?

There are 2 options

  • Discontinuance within five years of commencement - If all the premiums have not been paid for at least 5 consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later.
  • Discontinuance after 5 years of commencement - At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policyholder, levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount equivalent to one full year’s premium, the contract shall be terminated by paying the fund value.

17. What information related to investments is provided by the insurer to the policyholder?

The Insurers are bound to send an annual report, which would cover 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 to increase the policyholder’s benefit.

Hope this article answers all your queries. Read more to know why you should invest in ULIP now.

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~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.