What is the Settlement Option in ULIP?
The settlement option is basically the means to receive maturity proceeds in installments. This option can be exercised by the policyholder depending upon the terms and conditions of the policy. When it comes to the different types of ULIPs (Unit Linked Insurance Plans), the investment risk falls on the policyholder. Typically, once the policy reaches maturity, the amount of credit that is available under the policy will be encashed as the NAV (Net Asset Value) on the maturity date. However, with the settlement option in ULIP, the policyholder will have the option to encash the units at NAV on the date of each installment. The period should not extend beyond 5 years.
How to Settle Your ULIP?
With ULIP, flexibility is one of the major perks. Let us have a look at how ULIP works. The means by which you receive the maturity payout can be completely determined according to your needs depending upon the terms of the policy. Usually, the maturity amount can be received in two different ways.
- If you survive the term of the policy, you can collect your fund value. This is the NAV multiplied by the total number of units at the time of maturity.
- You or your nominee can collect the maturity amount in installments instead of collecting it as a lump sum. In case you opt for the staggered payout option in ULIP, you will have the option to withdraw your ULIP maturity amount in installments. However, to avail of this feature, you will have to complete your payouts for a span of 5 years. To understand how staggered payments in ULIP work, let us consider an example.
Consider that your ULIP policy matured on June 20, 2020. Let us say that you have 1 Lakh units of funds in your portfolio. On the day of maturity, which is June 20, 2020, the ULIP Net Asset Value (ULIP NAV) is ₹15. So, the maturity value, which is the fund value of your policy, will be ₹15 Lakhs. In this scenario, if you opt for a staggered payout, you will receive your maturity amount by the means of 5 installments. You should also understand that you will not receive ₹15 Lakhs in 5 payouts. Instead, the payout will vary depending on the number of pending installments and the outstanding fund value as at the installment date.
So, the payout you receive in each installment will be the outstanding value of the fund, as at that installment date, that is divided by the number of installments that are outstanding. By this method, the first installment you receive will be ₹15 Lakhs divided by 5, which comes up to ₹3 Lakhs. The second installment will be equal to the remaining fund value that is divided by 4. This trend continues till you receive your final installment.