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ULIP Settlement Option – All FAQs Answered

ULIP Settlement Option - Frequently Asked Questions

ULIP Settlement Options – All your Questions Answered!


Oct 25, 2021

By : Bajaj Allianz Life


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.


FAQs on Settlement Options in ULIP



1. Can one consider investing in ULIP?


If you invest in ULIP plans, you experience several benefits. They are a one of the preferred investment choices and can help you gain market linked returns.

One main benefit of investing in ULIP funds is the dual advantage of investment as well as insurance. You can also experience tax benefits as per the Income Tax Act of 1961, subject to provisions stated therein. In addition, you will also be provided with a choice of funds that can help you diversify your portfolio.


2. Are ULIPs considered to be a preferred investment option?


Investing in ULIP is subject to market risks such as the fluctuation in SENSEX levels and other indices. Usually, investors are encouraged to invest in funds that closely align with their long-term financial goals. This would help investors assess funds and experience market linked returns in the long run.


3. What tax benefits do ULIPs offer to NRIs?


NRIs can experience several tax benefits with ULIPs. According to Section 80C of the Income Tax Act in 1961, and subject to provisions stated therein, taxpayers can opt for a deduction of ₹1.5 Lakhs during one financial year. For ULIPs that were issued after the 1st of February in 2021 whose premium aggregates to more than ₹2.5 Lakhs, the maturity amount would be taxed as capital gains.


4. What is the minimum investment required to invest in ULIPs?


The minimum monthly investment varies between different ULIPs. You can apply for online or offline plans of ULIPs. The required minimum investment to invest in ULIPs may range from ₹1,000 to about ₹8,334 depending on the plan.


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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.