A Unit Linked Insurance Plan (ULIP) has been a part of the insurance sector since 1971 in India. However, many of you might still be unaware of the ULIP plan. A ULIP policy is a market-linked product, which combines the benefits of insurance and investment together in the same plan. Before you purchase a ULIP policy for you, you should understand the basic ULIP terms to make informed decisions in the future. Therefore, let’s go through the top ten essential terms you should know about a ULIP plan:
1. Lock-in period
A ULIP policy can have a lock-in period of five years. Due to the long lock-in period, you can build a substantial corpus throughout the tenure of the ULIP policy. If you want to accumulate more wealth, you should invest your money under a ULIP policy at a young age.
2. Sum assured
Sum assured amount is the pay-out that your nominees can obtain after your demise. With the sum assured amount, your family members can maintain their current standard of living in your absence. Therefore, select an adequate sum assured value by considering the financial requirements of your loved ones while purchasing a ULIP policy.
Premium is an essential component of a ULIP plan, which can be paid in return for the life cover. If you do not pay the premium due to circumstances such as loss of income, critical illness, physical disability, and so forth, your insurer can provide a grace period of 30 days. When you do not make the premium payment during the grace period, your ULIP policy can lapse.
4. Net Asset Value (NAV)
ULIP NAV can be determined as the per unit of a fund value’s asset post the deduction of the associated liabilities. It can be mathematically represented as NAV= Assets- Liabilities/ Total number of units.
As the name suggests, fund value indicates the total units held by you. Typically, you can calculate fund value by multiplying the total number of units by the monetary value or the NAV of each unit.
Under a ULIP policy, you can find the most common four types of charges, which are as follows:
- Policy administration charge
- Fund management charge
- Premium allocation charge
- Mortality charge
A policy can consist of two main types of ULIP funds, which are:
- Equity funds
- Debt funds
As a policyholder, you can select between equity funds and debt funds based on your risk appetite and investment goals. Since the returns can depend on the choice of funds, you should choose a ULIP fund wisely.
Returns can be described as the profits that you make on your investments. Under a ULIP policy, your returns can depend on your selected fund and risk tolerance. For instance, if you invest in an equity fund due to your high risk appetite, you can generate relatively high returns and vice versa.
When you park your money under a ULIP policy, you can avail the switching feature. With a switching feature, you can shift between equity funds and debt funds to secure your investment portfolio. For instance, you can switch to debt funds when the market is down and opt for equity funds when the market bounces back to receive high returns.
10. Benefit illustration
A benefit illustration has been made a mandate by the Insurance Regulatory and Development Authority (IRDA) today. It is a policy document, which lists down all the features, benefits, costs, etc. covered under a ULIP policy. It can ensure maximum transparency as well as avoid miss-selling of the ULIP product in the market.
In a nutshell, a ULIP policy can consist of various terms and concepts you might be unfamiliar with. If you begin by understanding the basics of a ULIP policy, you might end up learning the working of a ULIP plan in detail. However, you should conduct a thorough research about a ULIP plan and seek professional help. In simple terms, the more informed you are, the better are your chances of choosing the right ULIP plan for you.