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What Are Type-1 And Type-2 ULIPs?

Serving as one of the preferred financial tool for both investment and insurance, ULIPs are one of the most popular investments made in today’s time. Moreover, they offer an array of tax benefits and a flexibility in ULIP investments as per your specific financial goals and priorities. However, most investors are unaware that ULIP plans can also be placed into two distinct categories - Type 1 and Type 2. While both of these categories of ULIPs have their own advantages, it is important to first understand how they operate and how they can specifically benefit your financial goals. Here is a closer look at Type 1 and Type 2 ULIPs, their differences and their pros and cons.

Investment plans also act as tax-planning tools, as many avenues help reduce tax liability. There are different types of investment plans, and by choosing the right one, you can invest according to your needs and grow your savings.Read Less

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Written ByPalak Bagadia
AboutPalak Bagadia
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Palak Bagadia, Associate – Digital Marketing at Bajaj Allianz Life, with experience spanning content and performance marketing, recruitment, employee engagement in the BFSI industry.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 7th July 2024
Modified on: 7th July 2024
Reading Time: 15 Mins
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What is ULIP?

 

Before we delve into the types of ULIPs, let us first review the question of "What is ULIP?" and how it is beneficial for the average investor. A Unit Linked Insurance Plan, or ULIP, is an investment option, which offers the policyholder the dual benefit of investing in either equity funds or debt funds (or both), while providing life insurance coverage. Policyholders pay premiums, a part of which is channelized into market-linked instruments, and the remaining amount is used to provide life insurance cover by the insurance companies.

ULIP plans offer a wide variety of benefits to investors. Firstly, they offer investors immense flexibility in choosing funds as per their specific financial goals. You can invest in high-risk equity funds, medium-risk fixed income funds or even low-risk liquid funds, all managed by professional fund managers. Over time, as your goals and risk appetite changes, you can also switch between your choices of ULIP funds. Apart from this flexibility, ULIPs offer an opportunity for inculcating the habit of disciplined savings, receiving insurance coverage and availing various tax benefits.

 

Types of ULIPs

 

While ULIPs have increasingly emerged as a popular investment tool, many potential investors are unaware that most ULIPs can be differentiated into two categories - Type 1 and Type 2 (often referred to as Type-I and Type-II). Let us understand these two categories of ULIPs in detail –

1. Type 1 ULIP

In the event of the unfortunate demise of the policyholder, the insurance provider of a ULIP Type 1 plan pays either the sum assured or the fund value of the ULIP plan to the beneficiaries. Whether it is the sum assured or the fund value that is disbursed as death benefit depends on which of them is higher in value.

For instance, let us assume that you have paid premiums for your ULIP Type 1 with a sum assured of Rs 50 lakhs. Meanwhile, your investment fund value of your ULIP has also been generating returns. If at the time of your demise, your fund value is Rs 30 lakhs, then the death benefit received by your beneficiaries for your ULIP plan would be the higher of the two i.e. Rs 50 lakhs. However, if the fund value amounts to, say Rs 80 lakhs, this amount will instead be disbursed as death benefit.

2. Type 2 ULIP

In the event of the unfortunate demise of the policyholder, the insurance provider of a ULIP Type 2 plan pays the sum assured of the ULIP plan to the beneficiaries. Hence, the death benefit disbursed is the sum assured under the ULIP.

Taking the example stated above, let us assume that at the time of your demise, your sum assured is Rs 50 lakhs. The death benefit disbursed by the insurance provider to your beneficiaries would be 50 lakhs.

 

Difference between Type 1 and Type 2 ULIPs

 

ULIP plans differ based on features such as the type of insurance coverage offered, the type of funds, the type of premium payment options, and the investment objectives for the ULIP. In case of Type 1 and Type 2 ULIP plans, the distinction is made in terms of the final death benefit paid out by the insurer. This leads to certain marked differences between the two types of ULIP policies.

Firstly, as we can understand from the examples stated above, there is a difference between how the death benefit is calculated. In the case of Type 1 ULIP plans, the sum assured and fund value is compared and the higher of the two is deemed the payout. In case of Type 2 ULIP plans, the sum assured under the policy is deemed the payout.

Secondly, the two types of plans differ in terms of the "sum at risk". In case of Type 1 ULIP, the insurer would need to pay either the sum assured or the fund value as death benefit, depending on which one is higher. This means that each year, as your fund value grows, the sum at risk for the insurer keeps decreasing.

On the other hand, for Type 2 ULIP, the insurer has to pay the sum assured as death benefit. Therefore, the sum at risk for the Type 2 ULIP remains constant, year after year, even as your fund value grows and becomes higher than the sum assured.

 

Which One Should You Choose and Why?

 

While the difference between the definition and features of Type 1 and Type 2 ULIPs is clear, the question that remains is "What is the ULIP plan that is suitable for you?" The answer to this question is variable and depends on your financial goals and priorities.

At first glance, Type 2 ULIP plans might seem better since they come with greater benefits. However, it is important to note that since the risk borne for Type 2 plans is higher for the insurer, they may come with higher mortality charges than Type 1 plans.

 

Conclusion

 

With the wide range of benefits and flexibility that ULIPs offer, they serve as one of the preferred financial tool for a variety of investors. Whether you opt for Type 1 or Type 2, your choice of ULIP investment can always be customised to suit your specific financial requirements and goals for years to come.

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**Past performance is not indicative of future performance.

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.

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

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Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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The Unit Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of the fifth year.

ULIPs are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIPs are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. Bajaj Allianz Life Insurance Company Limited is only the name of the Life Insurance Company and Bajaj Allianz Life Goal Assure II- A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN No.: 116L180V02) is only the name of the unit linked insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

Bajaj Allianz Life Goal Assure II - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L180V02)

**Return of Mortality Charges at Maturity (ROMC) is payable at maturity, provided all due premiums have been paid

Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V04)

*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116


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