A life insurance policy protects you and your loved from the various uncertainties of life. Basically, it covers you from life risk. This cover is in the form a life cover that you, as a policyholder, get when you purchase a life insurance policy. One of the types of life insurance policies is the ULIP policy. This policy provides the dual benefit of investment and life insurance cover to the policyholder and their loved ones. Depending on your requirements, there are different types of ULIP policies to choose from. If you are planning to buy this policy, it is important that you read the benefit illustration of your respective policy. Read on to understand more about ULIP and its benefit illustration (BI).
What is ULIP policy?
When browsing through the different life insurance products, you might come across a product called ULIP. What is ULIP policy? ULIP, which is short for Unit Linked Insurance Plan, is a life insurance policy that allows the policyholder to gain wealth through investments. However, it also offers the policyholder life insurance cover from different life risks. The premium that you pay towards the policy is split into two: half is diverted towards the life cover and the other half is used for investments. You can invest in equity funds, debt funds or in both based on your risk appetite and life goals.
What are the types of a ULIP policy?
ULIP policies are based on the types of funds under the policy for investment. The types are:
- Equity funds: Investments are made in stocks of market-listed companies. This fund has a huge risk factor and offers higher returns. It is usually the choice of people who have a higher risk appetite.
- Fixed income funds: Investments are made in government securities and bonds and corporate bonds that allow a fixed steady income. This fund carries low risk and offers low-to-medium returns.
- Liquid funds: Investments are made in cash funds, money markets, and bank deposits. This fund carries a low risk factor and offers low returns as compared to equity and debt funds.
- Balanced funds: Investments are proportionately balanced between equity and det funds. This lets the investor get good returns without a high-risk factor.
Which fund should you opt for?
Depending on what your life goal and objective is, the fund should match accordingly. If you want to secure the future of your child or your loved ones, investing in debt funds or balanced funds would be beneficial. If your goal is wealth creation, you should opt for equity funds due to its high returns.
What is a benefit illustration?
As per the IRDAI mandate, life insurance companies are required to provide benefit illustration to the interested buyer. Benefit illustration of a ULIP gives the customer an idea about things such as how the premium they pay would get invested, what would their returns be based on the growth of their funds and what charges would be applied. It also helps the customer get an idea about how their funds will grow during the term of their policy.
How to read a benefit illustration?
The benefit illustration of your policy contains many terms that you may find confusing at first. However, they are quite easy to understand. Here are the main terms that you should be aware of when reading a benefit illustration:
- Policy year
This shows you the time period of your policy and how long you will be invested in the ULIP policy that you purchase.
This shows you the amount of premium that you will be paying towards the policy on an annual basis.
- Allocation charges
Allocation charges are applied on the premium that you pay for the policy.
- Policy administration charges
These charges get deducted from the fund value of your policy. The charges could either be fixed or can be variable.
- Management charges
Your insurer charges you for managing your funds for the duration of the policy. These charges are known as fund management charges.
Yield is the amount that you gain in returns from your ULIP policy. These returns are calculated at 4% and 8%, based on the mandate set by the IRDAI.
- Surrender value
This shows the amount that will be paid to you if you surrender your ULIP policy before the date of maturity. Do keep in mind that ULIPs have a lock-in period of 5 years.
When you plan on purchasing a ULIP, always remember to ask for the benefit illustration for your policy from your insurer. If you plan to buy a ULIP online, you will be able to check the benefit illustration on your system itself.