Common Questions Regarding ULIP Plans

A ULIP in insurance is a financial asset that kills two birds with one stone. In simple terms, unit-linked life insurance plans (ULIP) provide life insurance coverage along with creating a corpus of wealth for policyholders through investments. When purchasing a ULIP plan, you should have detailed information to make a wise investment. In light of this, we’ll learn about some common questions regarding ULIP plans in the article. 

Common Questions Regarding ULIP Plans

1. What type of funds are offered by ULIPs for investment? 

The policyholders can choose from a variety of funds according to their risk appetite. You can choose to invest in cash funds or money market instruments for high liquidity and the lowest risk, or you can choose to have balanced funds that include components of all of these, making it a medium-risk hybrid instrument. Equity funds are insecure, whereas bonds and other fixed-income instruments are less risky.

2. How Does a ULIP Plan Work? 

The insurance company collects the money from each policyholder and invests it in the funds that are chosen by them. The overall corpus is divided into “units” having a specific face value after the money has been invested. Further, depending on the contribution, “units” are divided among each investor. The price of each unit given at any point in time is known as “Net Asset Value” (NAV). The NAV changes in response to changes in the value of underlying assets. However, if any policyholder withdraws the funds partially, the equivalent number of units are sold and policy fees are subtracted. 

3. What is the comparison between ULIPs and mutual funds? 

Unlike mutual funds, where only the investment purpose is served, ULIPs serve the twin functions of insurance and investing. While mutual funds allow holders to make unlimited withdrawals, ULIPs have a 5-year lock-in period. ULIP plans provide tax exemptions to policyholders when they switch between the funds.  

4. Why is ULIP a good investment option? 

ULIP is the best long-term investment option. It offers policyholders the dual benefits of life insurance and investment. Half of the insured's premium is allocated to insurance, while the other half is invested in funds. The policyholders can also avail themselves of tax benefits under Section 80C of the Income Tax Act. Furthermore, you have the flexibility to choose between the funds available according to your risk tolerance. In a nutshell, ULIP is a good long-term investment option that can help you build wealth. 

5. Does ULIP investment provide guaranteed returns? 

The funds invested in ULIPs are subject to market risks and conditions. Therefore, anyone looking for guaranteed returns can invest in debt and fixed-interest bonds instead of equity. 

6. What all fees and charges are paid under ULIP plans? 

Here’s a list of charges that are to be paid under a ULIP plan. 

• Fund management charges: Fund management fees are subtracted as a proportion of the fund’s value prior to the fund reaching its net asset value. This fee is essentially paid as compensation for the fund manager for their knowledge and expertise. 

• Switch charges: Any policyholder switching between debt and equity funds 12 times in a particular year may have to pay Rs. 100/- as a switching charge. 

• Mortality charges: These fees are assessed based on your age and the level of coverage.

7. Is it possible to surrender my ULIP policy? 

The policyholder can surrender their ULIP plan if they wish to. The Insurance Regulatory and Development Authority of India (IRDAI) has introduced a cap on policy discontinuation depending on yearly surrender and annual premium as of September 1, 2010. As a result, a life insurance companies can charge a little penalty from the policyholders for a early surrender of the policy. 

8. What factors should you check before purchasing a ULIP plan? 

Listed below are some of the factors that you should consider while purchasing a ULIP. 

• Inclusions and exclusions
• Fees and charges 
• Premium payment term and lock-in period
• Policy termination terms and conditions
• Other disclosers 

Conclusion  

ULIP plans are a great source of investment for anyone who wants to accomplish their long-term financial goals. However, before purchasing ULIPs, make sure that you are aware of all the above-mentioned information.

Also read: What Is The Meaning Of Bonus In Life Insurance