Common ULIP Terms You Should Know About

With so many investment instruments currently available in India, it is understandable if you wonder, “why should I invest in ULIP“. Unit Linked Insurance Plans (ULIPs) have two distinct benefits, life insurance cover and investment avenues. By purchasing a ULIP, you can ensure your loved ones will be financially secured under any circumstances with life insurance. Additionally, you can create a fortune through investing in equity or debt funds. 

While you can significantly benefit from the ULIP returns, it is vital to understand the policy before investing in it. Here is a list of the common ULIP terms and their meaning that you should know before purchasing a policy.

  1. Fund value

The insurance providers use a portion of your premium to invest in a variety of market-linked funds. The capital in the ULIP fund grows over time to build your wealth. The fund value is the monetary worth of your fund on any given day. You can calculate it by multiplying the Net Asset Value (NAV) of a single unit with the total number of units you have. 

  1. Net Asset Value (NAV) 

A ULIP investment fund is made of multiple units. You can determine each unit’s price by dividing the fund value by the total number of units you own. The cost of a single unit is the NAV, which you can check regularly.   

  1. Sum assured

As a ULIP is essentially a life insurance policy, it offers a fixed death cover known as the sum assured. The insurer pays the amount to your nominees in case of an unfortunate event leading to your absence. When deciding the sum assured, ensure that it is substantial enough to support your life goals.  

  1. ULIP charges

Insurance companies charge you certain fees to maintain your ULIP and provide its benefits. These fees include fund management, policy administration, premium allocation, and mortality charges in ULIP. Before buying a ULIP, find out its associated charges to get an idea about your total expense.

  1. Premium

Premium is the amount you regularly pay to keep the ULIP active during its tenure. While purchasing the policy, you have the freedom to choose whether you want to pay the premium yearly, half-yearly, quarterly, and monthly. If you fail to pay the premium on time, the policy may lapse. So, you need to pay the premiums on time to avail of maximum benefits.

  1. Riders

ULIP add-ons or riders are additional covers that you can include in your existing policy by paying a higher premium. A few useful add-ons are the waiver of premium, critical illness, and accidental cover, among others. Riders enhance the scope of ULIP by making the benefits more comprehensive. 

  1. Maturity benefit

There are a variety of ULIP returns that provide you with financial profits. One such return is the maturity benefit that the insurance provider pays you at the end of the ULIP’s tenure. Section 10 (10D) of the Income Tax Act, 1961 makes the maturity benefit tax-free, resulting in higher profits. Note that according to the new Finance Bill, if you purchase your policy on or after Feb 1, 2021 and your ULIP premium exceeds INR 2.5 lakh per annum, the maturity amount will no longer be tax free under Section 10(10D) and will be treated as capital gain under Section 112A.

  1. Fund-switching

This is a unique feature that sets ULIPs apart from other investment options. As you already know, ULIPs allow you to choose among equity, debt, and balanced funds to invest your money. With switching, you have the option to reallocate your investment among the funds. This option comes in handy if your risk appetite changes or you want to adjust your investment strategy as per the changing financial market. 

  1. Lock-in period

ULIPs come with a lock-in period of five years. During this time, you cannot make withdrawals from the fund. You can discontinue the ULIP during the lock-in period, but that requires you to pay a surrender charge. Here, the insurer transfers the money into a discontinuation fund. You receive the amount after the end of the lock-in tenure.

Now that you understand ULIPs better, it is time to find a policy that meets your aspirations. If you are worried about the mortality charges in ULIP and other fees, be assured that the long-term returns will cover these expenses.