Traditional life insurance plans and their limitations

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 Meaning- What is ULIP Plan?

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. 

 

Types of ULIP Plans

ULIP Plans can be broadly divided on the basis of death benefits paid out: -

Type I ULIPs

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.

Type II ULIPs

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. 

Benefits of ULIP Plans

  • Tax Benefits – ULIPs offer great tax savings under Section 80C, Section 80CCC and Section 10(10D) of the Income Tax Act. Moreover, they fall under the EEE-Exempt Exempt Exempt tax exemption category.
  • Flexibility – ULIP plans give you the flexibility to choose from a selection of high, medium and low-risk investment options under the same policy.
  • Transparency- Important indicators like charge structure, the value of the investment and expected rate of returns are shared by the insurance company before you buy a ULIP plan.
  • Liquidity- ULIP plans allow partial withdrawal of funds to meet emergency financial needs.
  • Market Linked Returns- By investing in ULIP plans, you get the benefit of market-linked growth without actually participating in the stock market.

 

How does a ULIP plan work?

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.

 

Fees and charges levied by typical ULIP plans

  • Fund management charges- Fees for the management of funds is usually levied as a percentage of the value of assets.
  • Discontinuation charges- This fee is applicable if the policyholder decides to discontinue the ULIP scheme before the lock-in period of 5 years.
  • Mortality charges- This charge is levied on a monthly basis as compensation for the insurance company in case a policyholder does not live to the assumed age.
  • Surrender charges- This fee is applied in case of premature full or partial withdrawal of units.
  • Premium allocation charges- This fee is charged as compensation for the expenses incurred towards issuing of policy.
  • Policy administrative charges- This fee is charged to compensate the administrative charges involved in maintaining ULIP policies.
  • Fund switching charges- Switching fee is charged when you switch your fund type.

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