A unit linked insurance plan (ULIP) is a life insurance product that allows the insured to generate market-linked returns by taking advantage of different types of funds. With ULIP investment, you get life insurance protection, wealth creation opportunity and tax savings rolled into a single instrument.
Flexibility is the best part of ULIP benefits for an investor, as not only fund allocation but also how you wish to receive the payout can also be customised in accordance with your needs. Considering the market volatility caused due to COVID-19 pandemic, Insurance Regulatory and Development Authority of India (IRDAI), in the interest of policyholders, allowed staggered settlement of maturity payout across all ULIP investment plans maturing up to May 31, 2020, irrespective of whether such option is part of the terms of the policy. The rationale behind this step was to protect the corpus of policyholders from the huge market correction that has occurred due to the COVID-19 crisis.
The concept of staggered payouts of ULIP returns after maturity offers a protective shield for investors when markets are under turmoil and deep market correction occurs. In this article, we will understand the options available for policyholders to receive their ULIP maturity amount, and how staggered payouts work, its benefits, and why you should take advantage of this option.
Types of ULIP payouts on maturity
Generally, ULIP policyholders can generally receive the maturity amount in the following two ways:
1. If you survive the policy term, you receive your fund value, which is the total number of units under your policy multiplied by the current net asset value (NAV) of the fund.
2. The policyholder (in case of policy maturity) or nominee (in case of the policyholder’s death) can opt to receive the maturity amount in instalments rather than as a lump sum.
What is a staggered ULIP payout?
When you opt for a staggered payout in a ULIP policy, you can withdraw the ULIP maturity money in instalments. IRDAI mandates that the total payout should be completed within a maximum term of 5 years. Going for staggered payouts or settlement options can be especially beneficial when the stock market is performing badly.
How it works?
Let us understand how staggered payouts work with a simple example - Imagine that you have a ULIP Policy that is maturing on a certain date; let us say July 21, 2020. You possess 1-lakh units of the fund in your portfolio and on the date of maturity (July 21, 2020) the NAV of the fund is Rs. 15. Therefore, the fund value, which is also the maturity value of your ULIP policy, is Rs. 15 lakh.
Under such circumstances, if you opt for staggered payouts, also called settlement option, you will receive the maturity amount (fund value) in five instalments. However, it is important to understand that you will not receive 15 lakhs in five annual instalments. The payout will vary according to the outstanding fund value and the number of instalments. The payout in each instalment is outstanding fund value divided by the number of outstanding instalments. The first instalment will be equal to Rs 15 lakh divided by 5, which will be equal to Rs 3 lakh. The next instalment will be equal to the fund value divided by 4 and the payout will continue accordingly.
Benefits of staggered payouts
For ULIP policyholders, opting for staggered payouts can be especially beneficial for the following reasons:
• It helps you to avoid low fund valuation of your ULIP NAV during market corrections like the one we are undergoing now.
• Staggered payouts can also be opted for receiving death benefits. Rather than receiving the amount in lump sum, family members can receive monthly payments.
• Staggered payouts can be received in monthly, quarterly, half-yearly or annual instalments.
• You may mismanage a large sum of money if received as a lump sum. However, you may be more careful about spending it if received in instalments.
Staggered payouts in times of market corrections
As we all know, the world is going through a deep economic crisis due to the COVID-19 pandemic. Stock markets have been badly hit and valuation has plummeted. As a result, ULIP returns have also been negatively affected as we can see from declining NAVs. Investors waiting to receive their maturity amount will have to settle with low fund value, which may not be enough to meet their life goals.
With the objective to assist policyholders, the IRDAI has allowed staggered payouts for ULIP policyholders as low ULIP returns are expected due to prevailing market conditions. However, you can now switch funds or make partial withdrawals from your ULIP investment during the settlement period. In case the policyholder dies during the staggered payout period, the nominee will receive higher of 105% of total premiums paid or outstanding fund value according to the prevailing NAV rate.
Market history has proven repeatedly that after the stock market witnesses a fluctuation, it eventually starts to appreciate. In the current scenario, as the impact of COVID-19 subsides and life gradually returns to normal, there is a high probability that the market will rebound with a vengeance. In that case, ULIP fund NAVs would rise and those who have opted for staggered payout will stand to benefit in the upcoming years.