The Indian financial markets host a plethora of investment options, many of which offer a variety of benefits to investors. Among these are ULIPs or Unit Linked Insurance Plans, which offer investors the dual advantages of insurance and investment. Before you invest in ULIPs, it is important that you understand how they are structured and what the main jargon associated with them stand for.
So, let us begin at the basics.
What is ULIP?
If you are planning to invest in the Indian financial markets, one of the primary questions you may be looking at answers for is this: what is ULIP? You see, a Unit Linked Insurance Plan (ULIP) is a unique and hybrid investment option that combines the advantages of both life insurance and investment.
In other words, your premium is invested in the financial markets and is also directed towards providing you with a life cover. The premium that is invested is parked in market-linked instruments, so the returns that you get are linked to the market’s movements. As the policyholder, you have the option to choose from among investing in equity funds, in debt funds, or even in both. Each Unit-Linked Investment Plan consists of a different set of funds. When you invest in a ULIP, you are allocated a certain number of units in the ULIP funds that you choose.
In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) made changes with regard to the lock-in period of ULIPs. Earlier, Unit Linked Insurance plans had a lock-in period of 3 years. That was increased to 5 years. Therefore, now, ULIP insurance come with a minimum lock-in period of 5 years during which withdrawals are not permitted. It is important to keep in mind that ULIPs are one of the preferred investment options for achieving long-term financial goals, so you can truly reap the benefits of ULIPs if you remain invested for the entire term of the policy.
How ULIP fulfils your life insurance requirements
Now that you know what a ULIP essentially is, it is time to look into how ULIP plans fulfil your need for life insurance. In general, life insurance is a protective cover that can help you be better prepared for uncertainties and contingencies in life. It can also secure the financial future of the surviving members in your family in the event of your unfortunate demise. This is particularly beneficial if you are the primary breadwinner in your family.
ULIP can help fulfil your life insurance requirements because it also comes with an insurance component. The premium that you pay is also utilized to give you a life cover. Therefore, in case of your unfortunate demise, your nominees or beneficiaries will be paid a certain sum of money in the form of death benefit. This lump sum pay-out from the life insurance company can help your family tide through financial difficulties by acting as a replacement for their main source of income.
Death benefits paid out by ULIP insurance can even help your family remain on track and pursue their life goals as planned, even with the loss of income following unexpected contingencies. In this manner, ULIPs fulfil your needs and your family’s requirements with regard to life insurance.
Along with these benefits, ULIP insurance also offer returns from the investment. Here is where it becomes important to differentiate between the sum assured under the ULIP and the fund value in a ULIP. Let us take a closer look at each of these aspects.
What is sum assured in ULIP?
In a Unit Linked Insurance Plan, the sum assured is a term that is used to refer to the amount that the insurer pays the policyholder’s family in case the former passes away during the tenure of the policy. It is the amount promised by the insurer to the nominees of the policyholder in case the insured event occurs. This sum essentially assures the policyholder and their family that in case such an unfortunate event happens, at least an amount equivalent to the sum assured will be available for the surviving members to fall back on.
For example, say that the sum assured in a ULIP insurance plan is Rs. 20 lakhs. The policyholder who purchases this Unit Linked Insurance Plan will pay premiums to keep the plan active. In case the policyholder passes away during the tenure of the ULIP, the nominees mentioned in the plan will receive the sum assured, that is, Rs. 20 lakhs. This lump sum amount paid out by the insurance company is also tax-free as per section 10(10D) of the Income Tax Act, 1961 (subject to conditions specified therein), so the beneficiaries can use those funds to meet their emergency requirements or fulfil their life goals without worrying about the burden of taxation.
What is fund value in ULIP?
As mentioned earlier, when you invest in a ULIP, you are allotted units in the fund. The total worth of the funds you own in your portfolio is what the fund value is. Therefore, what this means is that the returns that you earn from your ULIP – that is the fund value upon maturity. To understand the concept of fund value, you need to first get to know what the Net Asset Value (NAV) is.
Net Asset Value
The Net Asset Value is the price of each unit in a fund. NAV of a ULIP fund depends on the performance of the financial markets. The fund value of a ULIP is calculated using the NAV of the ULIP fund. As per the regulations of the IRDAI, it is compulsory for insurance companies to declare the Net Asset Value (NAV) of each fund on a daily basis.
The NAV of a ULIP is calculated using this formula –
Net Asset Value (NAV) = (Assets – Liabilities) / (Number of Outstanding units)
The fund value of a ULIP is easy to calculate. It is the product of the NAV of each unit in the fund on any given day and the number of units that you hold. To understand this better, let us look at an example. Say you hold 100 units in a particular fund. In addition, assume that the prevailing NAV on a given day is Rs. 20. Therefore, in this case, the fund value of your ULIP is Rs. 2,000 (100 x 20).
As the NAV fluctuates on a daily basis, the fund value held by you also changes.
Which one do you get on maturity or death?
To understand this better, let us look at the different scenarios in which the insurance company makes pay-outs.
Scenario 1: Demise of the policyholder
In case the policyholder does not survive the tenure of the policy, the beneficiaries will receive an amount that’s equivalent to the higher of the sum assured or the fund value. Also note that in some cases both will be given as per the conditions specified within the ULIP plan purchased.
Scenario 2: Maturity of the Unit Linked Insurance Plan
If the policyholder survives the tenure of the ULIP, the policy is said to have matured. Upon maturity, the fund value is paid out to the policyholder.
Therefore, that wraps up the discussion on the difference between the sum assured in a ULIP insurance plan and the fund value. Knowing what these key terms mean can help you purchase a ULIP that covers your financial needs adequately, so you can meet your life goals without any hassle. Before you invest in a ULIP insurance, ensure that the sum assured is sufficient to get your family through any financial crisis that may crop up in case of an unforeseen misfortune.