Know the types of ULIPs

Go for quality ULIPs with low charges and a track record of solid returns

A unit-linked insurance plan (ULIP) is a product that combines insurance with investment. A small portion of the amount paid as premium goes to insurance and the rest is invested in market instruments such as equity, debt, or a combination of the two.

Here are the types of ULIPs in the market.

Differing on death benefit

ULIPs are classified as Type I and Type II based on the claim amount received by the nominee in case of the policyholder’s demise.

In Type I ULIP, the nominee receives the higher of the sum assured or the fund value as claim from the insurance company. The cost to the insurance company in this type of ULIP is lower because the sum at risk (the difference between the sum insured and the fund value) decreases over the years.

Say, for example, the sum assured is ₹10 lakh and the fund value at the end of the second year is ₹90,000; the mortality charge (amount billed by the insurer to provide life cover to the policyholder) is calculated on the sum at risk (₹10 lakh - ₹90,000).

Now, in the next two years, if the fund value becomes, say, ₹1,80,000, the sum at risk decreases. This could bring down the mortality charge.

Thus, in this type of ULIP, as the fund value and sum assured are expected to converge at some point, the mortality charge reduces over the years. Some of the examples of Type I ULIPs available in the market are Bajaj Allianz Life’s Goal Assure, HDFC Life’s Click2Invest and Edelweiss Tokio Life’s Wealth Plus.

On the other hand, in Type II ULIP, in case of death, the nominee will receive both the sum assured and the accumulated fund value. But the sum at risk, in this case, increases with the age of the policyholder as the fund value may go up as the years roll by. This increases the cost to the insurer.

Hence, the mortality charges in this type of ULIP could rise every year as the risk of death increases with age. Usually, the premium amount for Type II ULIPs is higher than that of Type I, given the benefits received in the former. Currently, not many insurers offer this type of ULIP.

Premium payment

For a unit-linked plan, an investor is required to pay premium for a specified period like any other insurance policy, and accumulate units. This premium can be paid monthly, quarterly, half-yearly or yearly.

As ULIPs are also insurance plans, the premium paid can be claimed as deduction under Section 80C.

Alternatively, you can pay the entire premium at one go and get covered for the full term. The advantage of paying a single premium is that you don’t have to keep note of due dates. The plan will continue for the entire period without any hindrances.

If you pay your entire premium at once, you can claim the tax benefits only for that year. Note that, for the proceeds to be tax-free, you should ensure the premium payable for any of the years during the term of the policy exceeds 10 per cent of the sum assured.

Tailored to your needs

There are various types of ULIP funds to suit your financial requirements. For instance, if you are expecting high risks and high returns from your investment, you can opt for ULIPs that invest in equity funds. Similarly, for low risk, there are ULIPs that invest in cash funds or fixed-income and bond funds.

ULIPs can be used as an investment tool for retirement. If your objective of investment is your child’s education, you can opt for a ULIP that pays out, say, after the child turns 18.

But disclosures are not substantial for ULIPs and charges are relatively higher than mutual funds. So, a careful analysis must be done and a suitable quality ULIP with low charges and a track record of solid returns must be chosen based on an investor’s needs.

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