ULIP Insurance: Know the Difference Between the Sum Assured and the Fund Value

It is possible to plan ahead for most things in life, like an upcoming vacation or a home renovation. To take care of the financial aspect of these scenarios, you need to have investments in place.

But then, there are some things that you cannot really see coming. For instance, an unexpected medical emergency in your family or a sudden accident that results in a massive damage to your vehicle - these things are unpredictable. Even though you cannot really plan ahead for such contingencies, you can rely on insurance to cover you financially in such cases.

So, to be fully prepared for the expected and the unexpected scenarios in life, you need both insurance and investments. As it turns out, there is one product that combines these two benefits. And that is the Unit Linked Insurance Plan or ULIP.

A ULIP, as mentioned above, gives you two benefits in one package. You get an insurance cover as well as an investment component. The insurance cover protects your family financially in case something untoward happens to you when the ULIP plan is active. The investment portion allows you to invest in different market-linked securities via ULIP funds, based on your goals and your risk profile. These ULIP funds include equity funds, debt funds, money market funds, and hybrid funds, among other options.

Since a ULIP plan includes two components - insurance and investment - there are two kinds of payouts you can expect from this product. The first is the sum assured under the plan, and the second is the fund value of your ULIP.

Let's take a closer look at what these two kinds of payouts are.

The sum assured under a Unit Linked Insurance Plan is the minimum guaranteed amount that the insurance provider will pay the nominee or the beneficiary, if the policyholder passes away during the policy term. This sum will be paid even if the fund value is lower than the sum assured.

The nominees and the surviving family members can use this payout to meet their everyday needs, pay off any debts, or fulfil their life goals. As per section 10(10D) of the Income Tax Act, 1961, this amount is not taxable either. So, the beneficiaries need not worry about any tax cuts.

The fund value in a Unit Linked Insurance Plan is simply the total value of the investments you have made in your ULIP funds. It indicates how much your investments have grown or reduced in value. To understand and calculate the fund value, we first need to take a look at what the Net Asset Value (NAV) is.

When you invest in a ULIP, you will be allotted a certain number of units in the funds you choose, based on the amount you invest. The NAV is the price of each unit in your ULIP fund. This NAV is declared on a daily basis by the insurance company, since the value changes every day based on the price fluctuations of the securities in which the fund invests. Here is how the NAV is calculated.

Here, the assets include the total value of the investments and assets made by the fund, while the liabilities include the expenses due.

Calculating the Fund Value
To calculate the fund value of your ULIP investments pon any given day, you need to use the NAV on that day. It is calculated using the formula shown below.

So, for instance, if you have a total of 1,00,000 units, and the NAV per unit on this day is Rs. 15, your fund value today would be Rs. 15,00,000.

Payouts in a ULIP can be made during the policy term, in case of the policyholder's demise. Alternatively, if the policyholder survives the policy term, the insurer will pay out the maturity benefits at the end of the term. Here is where the sum assured under a ULIP and your ULIP fund value matter a great deal.

Let's take a closer look at what amount is paid out in different scenarios.

Scenario 1: In case of the policyholder's demise during the policy term
Say a policyholder has purchased a ULIP plan with a sum assured of Rs. 50 lakhs. The policy is valid for 30 years, and in the 20th policy year, the policyholder passes away. At this point, let's say the NAV is Rs. 20 per unit, and the policyholder held 1 lakh units. So, the fund value would be Rs. 20 lakhs.

In this case, the insurer will pay out the following amount, depending on the type of ULIP.

• Type 1 ULIP:
  Here, the higher of the sum assured or the fund value is paid out. So, in the example above, the nominee will receive the sum assured of Rs. 50 lakhs, since it is higher than the fund value of Rs. 20 lakhs.


• Type 2 ULIP:
  Here, both the sum assured and the fund value are paid out. So, the nominee will receive a total of Rs. 70 lakhs.

Scenario 2: In case of policy maturity
Let's assume the policyholder in the above example survives the policy term. In this case, at the time of maturity, the fund value, which is the total investment value, will be paid out to the policyholder.

So, let's say that on the date of maturity, the NAV per unit is Rs. 45. And say the policyholder holds 1.5 lakh units. So, they would receive the fund value as the maturity benefit, which is Rs. 67.5 lakhs.

This clears up the common confusion between the sum assured and the fund value in a Unit Linked Insurance Plan. While the fund value typically depends on the market movements, the sum assured is something that you have to choose at the time of purchase. So, make sure that you choose an adequate sum, because this is the minimum financial safety net that your loved ones will have to fall back on in case of any unexpected developments.