Over the last few years, Unit Linked Insurance Plans have emerged as a popular financial instrument. The interest in this product has piqued for multiple reasons:
- Unit linked insurance plans are a blend of insurance and investments,
- The tax benefits provided by these plans help save a considerable amount of money and
- Investors can choose from various investment strategies to maximize their returns. What’s more? ULIPs offer flexibility to the policyholder in terms of premium amount or payment frequency. Moreover, the various charges/fees associated have also decreased recently.
In your quest for the best investment plans, it is important to know the different types of ULIPs available.
The premium paid towards a unit linked insurance plan is typically split into two parts – one part goes towards providing a life insurance cover to the policyholder, and the other part is invested in market instruments like stocks, bonds or funds (equity, debt or hybrid). Depending upon the risk appetite of the investor, he / she can choose the type of fund they want to invest in. An aggressive investor may put his money in equity only funds, while a conservative investor may put his money in debt funds or a balanced mix of both.
Most investors are aware of these basic benefits, yet there is still some ambiguity when it comes to choosing a good plan. Very few people know that there are actually two types of ULIP plans. It is important for policyholders to understand the difference between the two policy types that are available in the market today, namely – type 1 and type 2 ULIPs.
To understand the fundamental difference between these two, we need to look at the basic structure of unit linked insurance plans carefully. As mentioned earlier, the premium paid by the policyholder gets divided into two parts. A life insurance cover and an investment. If you have invested in type 1 ULIPs, and unfortunately there is an unforeseen incident, the insurance company will pay your nominee the sum assured or the accumulated fund value, whichever is higher. On the other hand, if you have invested in type 2 ULIPs, the insurance company will pay your nominee the sum assured plus the accumulated fund value.
In type 1, the insurance company initially faces the risk of paying the entire sum assured, in case of the policyholder’s unfortunate demise. However, this risk decreases year after year as the policyholder regularly pays his premium. Also, the ULIP returns gained, on the portion of premium invested, accumulate over the years.
Obviously, one would think that type 2 plans are better, as the financial benefit derived from these plans is higher. Most insurance companies charge the policyholder an extra cost for the added risk that they assume. Hence, policyholders have to pay a higher premium for type 2 unit linked insurance plans.
In both cases, type 1 and type 2 ULIPs, it is advisable to invest from a long term perspective. The longer your policy period, higher will be the financial benefits derived from the same. Now that you know the difference between the two types of plans, get a free investment plan quote at Finserv MARKETS and buy one of the best ULIP plans in India available today.
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