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Introduction

Mutual fund investments have risen in popularity as investors can get good value from its inherent benefits. Insurance, on the other hand, provides financial security in times of need. Hence, the value of insurance cannot be undermined.

 

But, what if the two were combined in a single investment?

 

Unit Linked Insurance Plans (ULIPs) do exactly that for you. ULIP Plans offer an investor the dual benefit of investments and insurance through a single source of investment. A part of the ULIP amount goes into providing a life insurance cover and the rest is invested in stocks, bonds, or funds (equity, debt or hybrid) which help investors benefit from market-linked returns.

Types of ULIP Plans

Type I

Under Type I ULIP plans, if the policyholder dies, the insurance provider either pays the sum assured amount or the fund value of the ULIP plan to the nominee(s). Whichever of the two is higher in value shall be disbursed to the nominee(s). So, if your sum assured is ₹40 Lakh and fund value is ₹50 Lakh, your beneficiary shall receive the fund value.

 

Type II

In such a case, the amount paid is the total of the sum assured and the fund value. The premium is thus higher in such types of ULIPs because of the enormous benefit in terms of the life cover amount on the death of the policyholder. If we consider the same example given above, the nominee would receive ₹90 lakh (₹40 lakh sum assured + ₹50 lakh fund value).

Difference Between Type I and Type II ULIP Plans

SInce ULIPs are classified as Type I and Type II plans, let us understand the differences between these two with examples:

Parameters

Type I ULIP

Type II ULIP

Death Benefit

In case of the policyholder’s demise, the sum assured and fund value is compared and the higher one is remitted to the beneficiary.

Here, the beneficiaries receive the sum assured + the fund value.

Sum at Risk

Since the fund value continues to grow with each year, the ‘sum at risk’ keeps decreasing for the insurance company.

Since the insurer has to pay the sum assured as the death benefit, the ‘sum at risk’ remains constant for the insurance company.

Which ULIP Plan Should you Choose?

Here are the factors that you need to consider while purchasing ULIPs:

 

  • If you have a bigger risk appetite, go for plans that invest in equities, otherwise go for debt investing plans that are the best for you.

  • If you are young or have taken loans, it is better to invest in a ULIP offering a sum assured that is sufficient to pay off your liabilities and take care of your family after your death.

  • Opt for a ULIP that comes with maximum value and minimal charges. These charges might include fund management charges, premium allocation charges, etc.

Now that you know the difference between Type 1 and Type 2 ULIP plans, you can make an informed decision. If you want to make the most of the death benefit, Type 2 is ideal for you. However, if you want sufficient coverage at minimal premium, Type 1 would be your choice. At Finserv MARKETS, we offer a wide range of ULIP plans that can be customised as per your specific needs. With equity, debt, and the combination of both, you have the comfort of choosing funds that would help you achieve your financial goals.

FAQs on Type I vs Type II ULIP Plans

  • ✔️Is ULIP qualified for tax deductions?

    Yes. The same can be availed under Section 80C and Section 10 of the Income Tax Act. This is an added advantage of ULIPs as they are also free from LTCG taxing.

  • ✔️Does ULIP offer periodical payments?

    Yes. However, the same is dependent on the plan you choose and the insurance company’s policies.

  • ✔️Does ULIP have a lock-in period?

    Yes. ULIP has a lock-in period of 5 years.

  • ✔️What is the sum at risk?

    The sum at risk is the difference between the death benefit paid and the fund reserves of your insurer.

  • ✔️Which is better between Type 1 and Type 2 ULIP plans?

    Both Type 1 and Type 2 ULIP plans have their own set of benefits. You must ideally go for a plan that offers maximum coverage at a feasible premium rate.

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