A Unit LinkedIn Plan (ULIP) has been part of India’s insurance sector since 1971. However, many of you might still be unaware of the ULIP plan. A ULIP policy is a market-linked product that combines insurance and investment benefits in the same plan. Before purchasing a ULIP policy, you should understand the basic ULIP terms to make informed decisions. 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 ULIP policy’s tenure. To accumulate wealth, you should invest your money under a ULIP policy at a young age.
2. Sum assured
The assured sum is the pay-out your nominees can obtain after your demise. Your family members can maintain their living standard in your absence with the sum assured amount. Therefore, select an adequate sum assured value by considering your loved ones’ financial requirements while purchasing a ULIP policy.
3. Premium
Premium is an essential component of a ULIP plan, which can be paid in return for the life cover. Suppose you do not pay the premium due to circumstances such as loss of income, critical illness, physical disability, etc. In that case, 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 deductions of the associated liabilities. It can be mathematically represented as NAV Assets- Liabilities/ Total number of units.
5. Fund value
As the name suggests, fund value indicates the total units you hold. Typically, you can calculate fund value by multiplying the total number of units by each unit’s monetary value or NAV.
6. Charges
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
7. Funds
A policy can consist of two main types of ULIP funds, which are:
- Equity funds
- Debt funds
As a policyholder, you can choose between equity 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.
8. Returns
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, investing in an equity fund due to your high-risk appetite can generate relatively high returns and vice versa.
9. Switching
You can use the switching feature when you park your money under a ULIP policy. With a switching feature, you can shift between equity 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 that lists all the features, benefits, costs, etc., covered under a ULIP policy. It can ensure maximum transparency and avoid miss-selling the ULIP product in the market.
In a nutshell, a ULIP policy can contain various terms and concepts you might be unfamiliar with. If you begin by understanding the basics of a ULIP policy, you might learn the workings of a ULIP plan in detail. However, you should thoroughly research a ULIP plan and seek professional help. In simple terms, the more informed you are, the better your chances of choosing the right ULIP plan.
