Common ULIP terminologies you should know about

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Introduction

Before you buy any financial product online - whether it is an equity share, gold, or even insurance - you will have to perform some research and understand the product better. And while you're doing this, there may be many confusing phrases and terms that you could come across.

It can be tempting to ignore these words and make your financial purchase without understanding the details. But that can prove to be a costly mistake later in life. So, before you invest in an asset or buy a financial product, you need to be 100% clear about what you are getting into. A big part of that is decoding all the jargon surrounding the product.

Today, we're going to do just that. And the product we'll focus on is a Unit Linked Insurance Plan or ULIP.

What is a ULIP?

A ULIP or a Unit Linked Insurance Plan is a kind of life insurance policy. It gives you two key benefits - insurance and investment.

The insurance part of a ULIP plan works like a regular life cover. You purchase a ULIP for a specific policy term, and you assign a nominee. In case of your unfortunate demise during this policy term, the insurance provider pays the sum assured to the nominee mentioned in the plan.

The investment part of a ULIP allows you to invest in different funds, like debt funds, equity funds, hybrid funds and more over the course of the policy term. During this period, you can switch your money from one fund to another a few times each year, free of charge. This way, you can keep investing in the assets that are performing well. Over time, your investment value may increase according to the price movements of the assets you have invested in. At the end of the policy term, this fund value will be paid out to you at maturity.

This is the basic idea of how a ULIP plan works. But even in the details mentioned above, there are phrases like 'sum assured' and 'fund value' that may be unclear for first-time insurance buyers.

So, let's get right down to the basics and check out the key terms you should know about ULIPs before buying one.

Common terms about ULIPs that you should know

  • Policy term

    The policy term is the period over which the life insurance covered offered by the ULIP is valid. In case of the policyholder's demise during this period, the life cover benefits will be activated and the nominee will receive the amount due under the plan.

  • Premium

    The premium is the amount that the policyholder has to pay the insurance provider in order to get the benefits of the life cover under the ULIP plan. You can pay the premium as a one-time amount, or you can pay it periodically on a monthly, quarterly, semi-annual or annual basis, depending on the terms and conditions of the policy.

  • Premium payment term

    The period over which you need to pay the premium for your Unit Linked Insurance Plan is called the premium payment term. It varies from one plan to another.

  • Single premium plan

    A single premium ULIP plan is a policy where you only need to pay the premium once – as a lump sum amount at the time of buying the ULIP.

  • Regular premium plan

    In a regular premium plan, you need to pay the premium charges periodically throughout the tenure of the plan. Here, the premium payment term is as long as the policy term.

  • Limited premium plan

    In a limited premium ULIP, you need to pay the premium charges periodically for a limited period. So, the premium payment term is limited to a certain number of years, and is shorter than the policy term.

  • ULIP funds

    When you buy a Unit Linked Insurance Plan, you can invest in different market-linked securities such as equity, debt instruments, money market instruments and more. ULIP funds are investment vehicles through which you can make these investments.

    Based on the kind of securities they invest in, you have debt ULIP funds, equity ULIP funds, hybrid funds and more. These funds also come with different risk levels and investment objectives.

    Insurance providers use the premium charges collected from different policyholders to invest in different market instruments via these ULIP funds. And each ULIP fund is divided into units. Based on the premium amount you pay, you will receive a certain number of units in the ULIP funds of your choice.

  • Sum assured

    The sum assured under a Unit Linked Insurance Plan is the minimum amount that is guaranteed by the insurer to the nominee of the policyholder, in case of the policyholder's death during the policy term. When you buy a ULIP plan, ensure that the sum assured is enough to financially protect your loved ones.

  • Fund value

    The fund value is simply the total value of your investments in the ULIP. Depending on the changes in the price of the assets you have invested in via the ULIP funds, the value of your investments will also fluctuate.

  • Net Asset Value (NAV)

    The NAV is the value of each unit in your ULIP investment. It is the net of the assets minus the liabilities of the fund, divided by the total number of units in the fund. The NAV of each ULIP fund will increase or decrease based on the market prices of the assets. As a result, your fund value will also vary accordingly. Here is a simple formula showing the relationship between NAV and fund value.

    Your ULIP fund value = Net Asset Value per unit * Number of units you own

  • Death benefit

    The death benefit is the amount that the insurance provider pays the nominee if the policyholder passes away when the policy is active. Depending on the type of the ULIP plan you choose, the death benefit can be any of the following –

    • Type 1 ULIPs:
      Higher of the sum assured or the fund value
    • Type 2 ULIPs:
      Both the sum assured and the fund value
  • Maturity benefit

    If you survive the policy term, the maturity benefit is paid out to you. This is simply the amount that the insurer pays out at the time of policy maturity. It may include the fund value, bonuses and loyalty additions, if any.

  • Fund switch

    When you first buy a Unit Linked Insurance Plan, you may choose to invest 100% of your money in equity funds because you are young and can take on more risks. But over time, your risk tolerance may decrease. Or the equity market may not be performing well. So, you may want to switch the funds you invest in to safer options.

    The fund switch feature in ULIPs allows you to move your investments around in a way that is beneficial for your needs and goals. Normally, you can make a certain number of switches free of charge during each policy year. After this limit, you will have to pay ULIP fund switching charges.

  • Surrender Value

    The surrender value of a Unit Linked Insurance Plan is the amount that the insurance provider will pay out to you if you surrender your policy before the maturity date.

  • Lock-in period

    Your ULIP comes with a lock-in period of 5 years. During this period, you cannot withdraw your ULIP investments, even if you surrender the policy. Even in case you surrender your ULIP before the lock-in period is complete, your funds will be paid out to you only after the 5-year period is complete.

  • Partial withdrawal

    During the policy term, you may have some emergency financial requirements. In case you are unable to meet these needs with any other source, you can rely on your ULIP's partial withdrawal feature. This facility allows you to partially withdraw some money from your fund value after the lock-in period. The minimum and maximum limits for partial withdrawal will be specific in the terms and conditions of the policy.

  • ULIP charges

    Since ULIPs have an investment component too, there are many expenses linked to making and managing these investments on behalf of the policyholders. Fund managers will have to monitor the markets and make decisions accordingly. So, they need to be paid for these services. Like this, ULIPs come with several other expenses that may not be found in other types of life insurance plans.

    Here are some such ULIP charges that you should know about.

    • Premium allocation charges:
      A percentage of the first year premium charges are allocated by the insurance provider for different costs like underwriting charges, medical test, and agent fees, if any. These are called premium allocation charges.
    • Fund management charges:
      These charges are levied as a percentage of the fund value, for meeting the regular costs of managing the ULIP funds.
    • Mortality charges:
      A part of the ULIP is also a life cover, which the insurer provides over the policy term. In doing so, the insurer takes on a certain level of risk. To cover this risk, they deduct mortality charges on a monthly basis from your fund value.
    • Fund switching charges:
      If your free switches for the year are fully utilised, you need to pay fund switching charges to make another switch during the policy year.
    • Partial withdrawal charges:
      If you choose to make a partial withdrawal from your ULIP fund, you may have to pay partial withdrawal charges as per the terms and conditions laid out by your insurer.
  • Top-up premium

    A top-up premium is the extra premium - over and above your regular premium - that you can pay to increase the amount you invest in your ULIP plan. You can avail this facility at any time during your ULIP policy term, provided you have paid your regular premiums on time.

  • ULIP riders

    ULIP riders are additional covers that you can buy along with your base ULIP plan. These riders enhance the coverage offered, since they cover specific events or expenses. Here is a closer look at some riders.

    • Accidental death benefit rider:
      Offers financial benefits in case the policyholder dies in an accident
    • Accidental death and disability rider:
      Offers financial benefits in case the policyholder dies or isdisabiled in an accident
    • Surgical care rider:
      Offers financial assistance in case of specific major or minor surgeries
    • Hospital care rider:
      May offer daily cash benefits, a lump sum payout, or a combination of the two in case of hospitalisation for a specific number of days
    • Critical illness rider:
      Offers a lump sum payout in case the policyholder is diagnosed with any of the specified critical illnesses
    • Waiver of Premium rider:
      Future premiums waived off in case the policyholder is unable to pay them due to certain specific situations, like a critical illness diagnosis or an accidental permanent disability
  • Policy lapse

    If you do not pay your ULIP premium on time, you will get a grace period (of 15 to 30 days). In case you don't pay your dues even during this grace period, the policy will lapse. This means that your life cover and your investment benefits will no longer be valid.

ULIP terms: An illustrative example

To understand these terms and phrases better, let's take up a scenario with a ULIP plan. Here is an example that uses some of the terms discussed above.

Say you are 25 years old today. You purchase a Unit Linked Insurance Plan with the following particulars.

  • The annual premium is Rs. 25,000 per year.
  • The ULIP is valid for a period of 35 years - till you attain 60 years of age.
  • It offers a cover of Rs. 50 lakhs.
  • You need to pay the premium on a monthly basis for 20 years.
  • You initially invest all your money in equity funds.

Given this information, let's see how the ULIP terms we discussed earlier will fit in.

Particulars

Details

Policy term

35 years

Premium

Rs. 25,000 per year

Premium Payment Term (PPT)

20 years

Type of plan

Limited premium plan

Sum assured

Rs. 50 lakhs

ULIP funds chosen

Equity funds


Now, say you are 45 years old, and at that point, the fund value is Rs. 40 lakhs. In case of your unfortunate demise at this juncture, here is what the death benefit payout will be, depending on the type of ULIP you chose –

  • Type 1 ULIP:
    Rs. 50 lakhs (higher of the sum assured or the fund value)
  • Type 2 ULIP:
    Rs. 90 lakhs (total of the sum assured and the fund value)

Conclusion

Now that you have taken a closer look at what these terms and phrases mean, you can understand your ULIP plan better before you buy it. Remember to read the terms and conditions in detail before you select your plan and make your payment, so you can be better prepared for the ULIP charges that come with the different features of your plan.

IN ULIP, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY POLICYHOLDER.
ADV/5/22-23/206

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