While traditional life insurance plans do offer benefits like risk cover, fixed returns and tax savings, they cannot be regarded as an investment. ULIPs on the other hand, offer the dual benefit of life insurance and investment. Hence, the lack of investment benefits is one of the major limitations of a traditional life insurance plan. Additionally, lengthy lock-in periods and lack of flexibility in portfolio allocation are also significant limitations of traditional life insurance plans.
ULIP is a versatile financial instrument that offers a unique combination of life insurance and market linked investment. By investing in a ULIP plan, you can enjoy the financial protection of a life insurance policy and grow your savings at the same time. A portion of the premium paid towards a ULIP scheme is dedicated towards life cover, while the remaining portion is invested in either debt, equities or a combination of both. The fund allocation is made according to the risk appetite of the policyholder and the returns determined by market performance. Bajaj ULIP plans have a minimum lock-in period of 5 years.
ULIP Plans can be broadly divided on the basis of death benefits paid out: -
Under the Type I ULIP plan, the nominee gets the Sum Assured or Fund Value as the death benefit. In case the policyholder dies during the initial years of the policy when the fund value is relatively lower than the sum assured, the insurer will pay the sum assured to the nominee. However, when fund value is higher than the sum assured, the fund value is offered as the death benefit to the nominee. In simple terms, Type I ULIP plans offers either the Sum Assured or Fund Value, whichever is higher as the death benefit.
Under the Type II ULIP plan, the nominee gets both the Sum Assured and Fund Value as a death benefit in the event of the demise of the policyholder. Hence, Type II offers a larger death benefit as compared to a Type II ULIP plan. However, the premium for Type II ULIP plan is relatively higher as the insurance company assumes higher risk from the policyholder.
Understand the workings of a Bajaj ULIP plan is simple. The premium paid towards ULIP plans is divided into two parts. One part is dedicated to providing a life cover, while the other is invested in the stock market. The insurer pools in money from various policyholders and invests the same in a wide range of funds chosen by them. The investments are managed by fund managers which takes away the need to track investments. Once the money is invested, the corpus is divided into smaller 'units' with a certain face value. The units are allocated to each investor in proportion to the invested amount. The value of each unit at a given point in time is referred to as Net Asset Value (NAV). As the value of the underlying assets increase or decrease, the same is reflected by the NAV.