How is your ULIP Premium Utilised

It took just one microscopic virus to derail entire nations' economies, proving just how easily life can completely change its course. As millions lost their jobs or were forced to take on salary cuts, having one's finances secured in savings and market instruments served monumental in shaping the quality of life. In times of unforeseen crisis, it has never been more clear that financial security is a necessity for everybody. Securing the protection of yourself and your loved ones is always a great idea, no matter what the future holds.

Through the protection from insurance, and returns from market instruments, a unit-linked insurance plan's intended purpose is to serve as that security blanket that can keep you and your loved ones safe, especially when life throws curveballs. Financial instruments like ULIPs serve to demonstrate that while a regular income can supplement your lifestyle, growing wealth can sustain it over the long term. Let's delve into how ULIPs work and what you can expect if you choose to buy one.

What is a ULIP?

A unit-linked insurance plan or ULIP is a new-age insurance policy that offers the benefits of investing in market while giving you the protection of a life insurance plan. Hence, while you can grow your wealth gradually by investing in funds of your choosing through your ULIP plan, you are insured for life which can ensure your family will be protected in your absence. One of the best ways to close the gap between inflation and income is to invest in market instruments wisely.

By giving you the option to invest in all kinds of market-linked funds like equity and debt funds in a ratio that works with your preference, ULIPs can help you achieve your financial goals. Be it funding a marriage, paying for higher education, or planning for retirement; by clarifying what your financial goals are, you can work towards achieving them with your ULIPs. But how do these investment vehicles work?

How do ULIPS work?

• ULIPs work by putting your invested premiums into funds of your choosing.
  
• Your money will be locked into funds of your choosing for five years.
  
• This corpus will grow as a result of long-term market-linked returns.
  
• Additionally, some ULIPs also give you the option to change your funds during the period in which the policy is active, as they specify during their terms and conditions.
  
• Based on your risk appetite and financial goals, you have the option to invest in equity funds, debt funds, or a combination of both that suits your preference.

Additional ULIP Charges to know about

Every investment, including ULIP premiums, has charges that are associated with them. The investment-related component of ULIPs also has costs associated with it. These ULIP charges can be divided into several types and are deducted out of the premium invested or the fund value in your ULIP's portfolio. When you pay your monthly premium, it is automatically used for these charges, and the costs remain relatively similar across policies. ULIPs can charge expenses under the following categories:

• Premium Allocation Charges:
  These ULIP charges will be incurred by the company when they allocate your premium to market-linked securities. This cost is applicable to a percentage of the total premium. It depends on factors like the mode of payment, frequency of the premium, and more.
  
• Policy Administration Charges:
  These ULIP charges relate to the administration of your policy in the form of managing withdrawals, nomination charges, and the cost of issuing dividends. These costs comprise in-office expenses as well, like paperwork. The costs can either apply at a flat rate or a predetermined percentage.
  
• Fund Management Charges:
  These charges are incurred for managing your investments in funds that are chosen by you. They are directly deducted from the fund's asset value. The fund's NAV is what is estimated to be the value of the fund once all expenses are deducted. Fund management charges are a fixed percentage that can vary from 0.50–to 1.35% of the asset's value.
  
• Cost of Switching Funds:
  This is a charge that is associated with transferring funds from one fund option to another within one's ULIP plan. It is typical for some companies to offer a certain amount of fund switches for free. Once that limit is exhausted, the cost of switching funds is applied.
  
• Discontinuation Charges:
  This cost is applied when you choose to surrender your policy prior to its maturity or claim. This charge is also applicable when you try to discontinue your policy within the lock-in period.
  
• Mortality Charges:
  Your mortality charge is associated with the life insurance cover that is given to you once your policy is active. The amount of mortality charge that is provided to you is typically applied monthly and is levied by way of cancelling existing units. As the fund value increases, this charge can decrease.
  

How your ULIP premium is utilised

So with all of the different charges stated above, you can get a clear idea of the purpose of these extra costs and where your premiums are going. When it comes to how your premium is utilised when you invest in a ULIP, here's a rough sketch. When your premiums are paid towards a unit-linked insurance plan, the assumption is that part of it is invested in market instruments and the remainder in your life insurance policy.

This is not exactly true. Instead, the majority of your premium goes directly to the funds you have chosen to invest it in. You always have the option to switch between funds, provided you know of associated costs with this switching, to choose funds that give you the returns you are looking for. But what about the remainder of your ULIP premiums?

While the majority is invested directly into your funds, the remainder of your ULIP premiums goes into the costs stated above along with an added charge going toward your life insurance. These charges include the premium allocation cost, policy administration charges, fund management charges and other miscellaneous expenses. As specified above, some ULIP plans may also impose fund switching charges after a certain limit, partial withdrawal charges, and premature surrender charges. Ensure you are well aware of these costs at the time of investing.

Where does life insurance factor into ULIP premiums?

If your premiums are going toward market-linked funds and added costs, where do you get your life insurance from? The answer is within the added charges.

Usually, your life insurance premium is part of the added charges in your ULIP. It is just comparatively smaller than the amount of your premium that is invested in funds. Think of mortality charges; a charge associated with the life coverage that is provided to you from your policy. This is one of the ‘added costs' but is critical since it depends on your age, policy term, and the sum that was assured to you from your policy.

The insurance cover you are expected to get from your policy is likely ten times the gross annual amount of premiums you paid subject to the terms and conditions of your policy. In case the policyholder passes away prematurely, his/her nominees can receive the death benefit as detailed under the policy. Note that some insurers also offer unit-linked insurance plans that let you receive your mortality charges back at the time of maturity. This feature is known as the return of the mortality charge.

Conclusion

By investing in ULIPs, you can achieve your financial goals and enjoy a fulfilling life. These products are intended to give you the best of both worlds: the protection of a life cover along with the growth from market returns. Be mindful of all the costs associated with your plan when comparing policies.

References

• https://www.newindianexpress.com/business/marketing/2021/aug/24/understanding-how-your-ulip-premium-is-utilised-2349065.html
  
• https://www.canarahsbclife.com/blog/ulip/how-is-your-unit-linked-insurance-plan-premium- utilised.html#:~:text=For%20ULIPs%2C%20as%20is%20the,well%20as%20an%20investment%20instrument.
  
• https://www.aegonlife.com/insurance-investment-knowledge/ulip-premiums-money-invested/