• What are ULIPs?

Unit-linked insurance plans, or ULIPs, provide life cover and provision of long-term savings through investment in the markets, though they are structured differently. Investment in ULIP works like mutual fund as the insurer deducts charges towards life insurance (mortality charges), administration charges and fund management charges and the rest of the premium is channelized into some underlying funds that invest money in stocks/ bonds/ money market instruments, as per your choice. The insurance cover includes death benefit, disability and critical illness. The policyholder’s share in the fund is represented by the number of units. The value of the unit is determined by the total value of all the investments made by the fund divided by the total number of units. If the insurance company offers a range of funds, the insured can direct the company to invest in the fund of his choice. Insurers usually offer choices like equity fund, balanced fund, bond funds and cash funds.
It you survive the policy term, or redeem midway, you get the net asset value (as on redemption date) multiplied by the number of units you hold. The net asset value depends on the performance of the corpus that the insurance company manages just like that of a mutual fund. In case of death of the insured life, the beneficiary receives either the sum assured, or the value of the fund, whichever is higher.

• How does ULIP works?
The cost of a ULIP is deducted from the premium that a policyholder pays. The premium paid minus any charges deducted, is used to buy the units of the fund selected by the policyholder at that day’s unit price. Hence, more units keep on adding in your account each time you pay the policy premium. If the unit price on that day is high then you get less number of units and if the unit price is low then you get more number of units. The value of the fund depends on the unit price which is determined from the market value of the underlying assets. Thus, the fund value is determined by multiplying the number of units with the price of the unit (Fund Value= Price of Unit x Number of units).

• Why ULIPs instead of traditional insurance plans?
In ULIPs insurers can sell the policies with less capital of their own than what would be required if they sold traditional insurance policies. In the traditional insurance plan the insurance company bears the investment risk to the extent of the assured amount while in ULIPs, the policyholder bears most of the investment risk.

Since ULIPs are devised to mobilize savings, they give insurance companies an opportunity to get a large chunk of the asset management business, which has been traditionally dominated by mutual funds.

ULIPs do provide the policyholders with the flexibility of terminating/resuming premiums, increasing/decreasing premiums and paying a top-up premium over and above the regular premiums whenever possible. These options are not available in regular endowment plans. Also the policyholder does not have to commit to a fixed level of cover or investment at the time of the inception of the policy. As a particular level of cover and investment is selected as per the choice according to the premium paid and as the circumstances change the level and the mix of benefits can also be changed. However in the traditional insurance plan withdrawal is not allowed before maturity.

Investing in a ULIP brings transparency, as the policyholder knows where and what percentage of his premium is being invested as their portfolio is disclosed at regular intervals, as well as what are the charges levied on it.

• What are the various types of ULIPs?
There are two options available in a ULIP. They are single premium and regular premium. In single premium product you need to pay only one premium. The death cover is either 125% or 500% of your premium or anything between this. As mentioned earlier, the death benefit is the sum assured, or the value of the fund, whichever is higher. In some plans the nominee gets both the sum assured and the value of the funds. Also make sure that the cover is at least five times the premium you are paying then only the entire premium will get deducted from taxable income under Section 80C.

In case of regular premium you end up paying at regular intervals for a minimum stipulated period. Here in the event of death the claim is usually a multiple of the annual premium. The death benefit payment will be the sum assured or the value of fund whichever is higher.

• What are Type I and Type II ULIPs?

ULIPs do provide two options Type I and Type II in the event of death of the policyholder. Under Type I, if the policyholder dies during the term of the policy, the nominee receives the sum assured or the value of the fund, whichever is higher.

Under Type II, the nominee receive both the sum assured as well as the value of the fund, making the amount larger but it surely costs more to the policyholder.

In both the options the maturity value of the policy remains the same i.e., value of the fund as per returns from the market.

• Where ULIP does invests the money of a policyholder?
ULIP’s do provide a variety of options to the policyholders to invest their money apart from the premium paid for the insurance cover. One can invest in the range of equity to debt funds depending upon their investment objectives, risk appetite and time horizon. As different funds carry different types of risk profiles as well as their returns do differ from each other.

The following are some of the common types of funds available along with an indication of their risk characteristics: -

• How flexible can ULIPs be?
A ULIP offers the policyholder an acute degree of flexibility right from choosing the Sum Assured, to the desired premium amount and the frequency of premium payment. ULIPs give the policyholder the option of changing the level of Premium/Sum Assured even after the plan has already been started, one can also change asset allocation by switching between the funds with ease, there is transparency in charges, policyholder has the option to take additional cover and there is liquidity through partial withdrawals. The policyholder has flexibility to select his own level of investment and protection. Thus investments in equity related funds tend to give more returns than the traditional insurance plans over the long term, but one need to understand that higher returns come with greater risks.

• What things should be taken into consideration before buying ULIPs?
There are many things one need to consider before buying ULIPs such as the time period of insurance cover and investment, the amount of investment, frequency of premium payment, types of funds, level of protection. So you need to estimate the options which are suitable enough as per your requirement.

Here are few things one need to consider before buying a ULIP: -
1. Protection Cover: The premium paid for the ULIP policy provides insurance cover for death and total permanent disability of the policyholder. With additional premium one can also get cover for certain critical illnesses. The death benefit payment at the time of claim will be the sum assured or the value of fund whichever is higher will be paid to its nominee.
2. Net Yield: One should look for the yield based on the parameters because there are various types of fees and charges which reduce the value of investment and thus the net yield helps to make a better comparison of the investments made.
3. Right fund to invest: There are varieties of fund options one can invest into like equities which involve greater risk then debt funds.
4. Fund Switching: If you think that you have mistaken in choosing the fund type for your investments, then you can make changes in your portfolio. Insurers do allow certain switches per year without any fees.

• What charges are to be made in ULIPs and how are they charged?
ULIPs offered by different insurers have different charge structures. Broadly, the different types of fees and charges are given below. However, it may be noted that insurers have the right to revise fees and charges over a period of time.

1. Premium Allocation Charge: This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.
2. Mortality Charges: These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc.
3. Fund Management Fees: These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV).
4. Policy/ Administration Charges: These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
5. Surrender Charges: A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.
6. Fund Switching Charge: Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.
7. Service Tax Deductions: Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.
8. Other Charges: These are deducted from the units of your investment account for the insurance cover and other benefits. It totally depends on the type of the cover selected as well as other factors like age, sex, smoking habits etc.
Then the remaining amount is utilized in purchasing the units. Thus, ULIPs d provide transparency in disclosing their charges levied on the policy.

• How long one should hold a ULIP?
There is no fixed time of how long one can hold the ULIP. It is like a saving account or a mutual fund where the policyholder has to decide the duration of holding the policy. Though ULIPs are considered to be long-term instruments, to be held not less than 10 years, they are not for short period of time because of their higher initial costs.

• Accelerated premium payments
Insured can finish his/her financial responsibilities by accelerating the premium payments.

• How do ULIPs compare with mutual funds?

• What happens if a policyholder discontinues in paying the premium?
In ULIPs there lies an option in discontinuing payment of premiums, but the effect of stopping payment of premiums are different whether premium have been paid in the first three years.

Discontinuance within 3 years of commencement: If all the premiums have not been paid for 3 years from the inception of the policy then the cover shall cease immediately though insurers might allow the policyholder to revive it within the specific period, but if it is noit revived then surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later.

Discontinuance after 3 years of commencement: The contract shall be terminated after the surrender value is paid up at the end of the revival period. The insurer may continue the insurance cover after levying appropriate charges until the fund value is not less then one year’s premium. When the fund value reaches the amount to one year’s premium after paying the fund value the contract shall terminate.

• What risks are associated with ULIPs?
ULIPs also involve some risk. Though the sum assured is guaranteed but the investment part is subject to market risks. As a ULIP is linked to the unit price of the fund, the total value of the plan fluctuates along with the movement in the unit price. If the unit price on that day falls the value of the investment will reduce and vice versa. Past performance can only be a guide to the future performance, which is not guaranteed. Every product has certain degree of risk. Investors should understand the element of risk and accordingly be ready to accept it. Thus the investors should consider the risk tolerance before deciding on the type of fund to invest in.

• Market is down. So is this the right time to buy a ULIP?
Low or high market conditions should never be the starting point of a buying decision. Buying a ULIP should be backed by the need to save money and create wealth for the longer term horizon. Being a long term instrument investment in ULIPs may see the highs and lows of the market but it will consequently average out and would create wealth in the long term. ULIP gives an investor the combination of investment and protection. A financial need like retirement, children’s education gives a reason to save by participating in equities through a product like ULIP.

• If ULIPs are market-linked, how can they offer a guarantee?
Certain ULIPs do offer guarantees in their plans. Different ULIPs provide different types of guarantees. In some of them, the amount of premiums paid minus the total charges is guaranteed at maturity. In others, a return on the premium paid is guaranteed to the investor. In some of the ULIPs the entire first-year premium is paid back on maturity along with some additions.

• Why one should opt for ULIP, though don’t want to invest in shares?
Investing in ULIPs cannot be compared with the investment in share market. Not all ULIPs are related to shares, or there is no other option available other then investing in shares. But the fact is the investor has an option to in debt products, or in equities (shares) or both through various fund options. One can also go for full investment in the debt fund with no exposure to equities. One should select the fund option depending upon his risk profile. But equities do provide higher inflation-adjusted real returns than all other asset classes in the long run.

• Which is the best ULIP in the market?
There is no such single product that suits the needs of all the investors. As mentioned before, ULIPs are long-term instruments and is desirable for people who are not in a position to keep insurance and investments separate. Each ULIP has its unique feature, so whatever is suitable after knowing the individual plan of different insurers one should invest. A plan that supports your long term goals would be the best for you. As it is said that guaranteed returns always come at a cost.

• Overall what factors need to be considered to buy ULIPs?
There are few factors one should understand properly before buying a ULIP they are as follows:
All charges deductible under the policy
1. Payment of premature surrender
2. Features and benefits
3. Limitations and exclusions
4. Lapsation and its consequences
5. Other Disclosures
6. Illustration benefits payable in 2 scenarios of 6% and 10% returns as prescribed by the Life Insurance Council.
Thus, before investing in ULIPs just understand the concept of it and also consider the amount of risk you are willing to take and make sure to keep your money locked-in for a longer time horizon. As for your convenience there is a 15 days free-lock period for you to decide whether you want to continue with the product and if you decide to cancel the policy cover within this period the insurers will pay full fees or charges you have paid. However, the amount refunded could vary from what you paid depending on the current price of the units at the time of cancellation of the policy cover.