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Unit Linked Insurance Plan (ULIP)
Updated on: July 19, 2020
A typical Unit Linked Insurance Plan (ULIP) comes with a 5 year lock-in period and is eligible for Tax Saving. The value of invested Units (NAV) is updated on daily basis as per market returns.
A Unit Linked Insurance Plan (ULIP) is a combination of Life Insurance and Investment, unlike an endowment plan. In an endowment plan premium paid earns profit (in the form of Bonuses) on insurance companies’ business, whereas premium paid in a ULIP plan has two parts; one portion is used to buy Life insurance cover and remaining portion is invested into capital market ( Equity Shares, Government Bonds, Corporate bond etc) on the behalf of policyholder. It is very similar to Mutual Funds (MFs) except one major difference i.e. a ULIP provides Life Insurance, whereas a Mutual Fund does not.
What is a UNIT in ULIP?
A policyholder has to choose a particular fund type for his/her investment portion. Investment portion of a particular fund type from all policyholders is pooled together to create a fund and it is called as Unit fund. Invested amount of a policyholder in a particular fund is represented in terms of Units. Each unit has its value in rupee terms and the value is called NAV of a UNIT. For example, a fund has total value of Rs. 100 which can be divided into 10 units and if a policyholder owns 2 units it will mean that his policy has total net fund value of Rs. 20.
Type of Funds
Fund types are categorized on the basis of Nature of Investment of its pooled amount. Nature of investment has risk profile associated with it. Following table enlists popular fund types and the risk associated with them.
| Fund Type | Nature of Investments | Risk |
|---|---|---|
| Growth Fund | Equity Shares | High |
| Bond Fund | Invested in corporate bonds, government securities and other fixed income instruments | Medium |
| Cash Fund | Sometimes known as Money Market Funds — invested in cash, bank deposits and money market instruments | Low |
| Balanced Fund | Combining equity investment with fixed interest instruments | Medium |
Lock-in Period and Tax Rebates
ULIP plans have lock-in period of 5 years. Premium paid is exempted u/s 80c and maturity or death claim is tax free u/s 10(10D); provided sum assured is at least 10 times of the annualized premium.
Policy Surrender
Policy can be surrendered anytime during policy term and there will be discontinuance of charges in case policy has been surrendered during the lock in period.
Various Charges and Fees in ULIPs
Unlike endowment plans like Jeevan Anand, Jeevan Labh, ULIP plans provide more transparency and control to policyholders (as far as various charges and fees are concerned). Various charges and fees associated with ULIPs are explained below.
Mortality Charges
Mortality Charges are deducted to provide life cover to the policyholder. Mortality charges depend upon sum assured (Life cover) and age. Mortality charges also depend upon kind of survival benefit the policy provides in case of maturity. For example-in case of survival benefits (or return of Mortality Charges) it will be higher compared to policy with no survival benefits (like term insurance). Sample Mortality charges has been given in the below table.
| Fund Type | Nature of Investments | Risk |
|---|---|---|
| Growth Fund | Equity Shares | High |
| Bond Fund | Invested in corporate bonds, government securities and other fixed income instruments | Medium |
| Cash Fund | Sometimes known as Money Market Funds — invested in cash, bank deposits and money market instruments | Low |
| Balanced Fund | Combining equity investment with fixed interest instruments | Medium |
Premium Allocation Charges
It is deducted from premium paid by the policyholder for initial and renewal expenses apart from commission expenses.
Mortality Charges
Mortality Charges are deducted to provide life cover to the policyholder. Mortality charges depend upon sum assured (Life cover) and age. Mortality charges also depend upon kind of survival benefit the policy provides in case of maturity, for example, with survival benefits (or return of Mortality Charges) it will be higher compared to policy with no survival benefits (like term insurance). Sample Mortality charges is given in the below table.
| Age | Yearly Mortality Charges for per 1000 of Sum Assured(Rs.) |
|---|---|
| 25 | 1.32 |
| 30 | 1.32 |
| 35 | 1.60 |
Fund Management Fees
This fee is charged for management of the fund. Fund management charges means expense incurred for investing in capital market.
Policy Administration Charges
This fee is for administration of the plan and is levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
Fund switching Charge
A Policyholder can change Fund type from one type to another, it is known as fund switching. There is some free of cost switching which is available in a year and after that insurance company deducts switching charges.
A simple example
A 30 year old person purchases a ULIP plan with a premium of 20000 per year on 1st July, 2020. Suppose the ULIP plan was launched on 12th January 2020 and at the time of launch NAV of one unit was Rs. 10. On 1st July 2020, NAV has increased (appreciated) to Rs. 12. Generally Sum Assured is 10 times of annualized premium (to enable the premium paid qualify for Income tax exemption under 80c), so Sum Assured will be 2,00,000 in this case.
| Calculation For First Month | ||
|---|---|---|
| Yearly Premium | A | 20000 |
| Premium Allocation Charges | B=3% of A | 600 |
| Premium Less Allocation Charges | C= A-B | 19400 |
| Monthly Mortality Charges for 200000 (@ 1.32 per 1000 of Sum Assured) | D=200000*1.32/(1000*12) | 22 |
| Premium Less Mortality Charges | E= C-D | 19378 |
| Units allotted @ NAV Rs. 12 | F=E/12 | 1615 |
After completion of first month, mortality charge for second month is deducted by cancelling units appropriately and again units are calculated. Following table shows indicative calculation for second month.
| Calculation For Second Month | ||
|---|---|---|
| Carry forward Units | A | 1615 |
| NAV(Rs.) | B | 12.5 |
| Monthly Mortality Charges for 200000 (@ 1.32 per 1000 of Sum Assured) | D=200000*1.32/(1000*12) | 22 |
| No of cancelled Unit for Mortality Charges | D=C/B | 2 |
| Number Units | E=A-D | 1613 |
| Total Fund Value | F=E*B | 20162 |
Above details are not exhaustive about ULIPs, for more details and clarifications, please write in comment box.
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