What is ULIP Policy? - Types & Plans 

About ULIP

ULIP Meaning – What is ULIP?

ULIP full form is Unit Linked Insurance Plan, and it is a relatively new product in the market. Also, being a versatile financial instrument, it offers a unique combination of life insurance cover and market-linked investments. By investing in a ULIP, 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 life cover, while the remaining part is invested in funds of your choice. The fund allocation is made according to the risk appetite of the policyholder and the returns determined by market performance.

How Does a ULIP Plan Work?

Understanding the workings of a Bajaj Allianz 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 increases or decreases, the NAV reflects the same.

Important Terms in ULIPs

Here is a list of must-know terms in ULIP investments.

• Fund Value – It is the total monetary value of the fund units owned by the policyholder.

• Sum Assured – It is the amount guaranteed to the policyholder after the policy term is over.

• Partial Withdrawal – The policyholder can withdraw a certain amount before the policy matures. Partial withdrawals can be done after the completion of the five-year ULIP lock-in period.

• Fund Switch – It is a feature in ULIPs that allows policyholders to switch between investment funds. With this, you can switch from equity to debt and vice versa as per the market performance of your investment. Check with your insurer whether fund switching is chargeable or not before availing the feature.

• Top-up Premium – It is an additional amount that you can pay over and above your existing premium amount.

• Premium Payment Term – You can choose to pay ULIP premiums either as single-premium payment or as regular premium payment. In single-premium payment, you pay a lump sum amount together. Whereas, in regular premium payment, you get to pay premiums at regular intervals.

• Policy Surrender – This means you want to exit the plan before the policy matures.

• Surrender Value – It is the amount you pay in the event of policy surrender.

• Maturity Benefit – It is the amount you receive in the event of policy term completion.

• Death Benefit – It is the amount your beneficiaries receive from the insurer in case of your sudden and unfortunate dismissal.

• ULIP Charges – These are the charges levied by the insurer. We have discussed ULIP charges in detail in the section below.

Types of ULIPs

ULIPs are broadly classified as follows –

1. Risk and Investment Objectives

2. Purpose

3. Death Benefits

We have discussed each category in detail below.

Types of ULIPs Categorised by Risk and Investment Objectives

The ULIP funds are categorised based on their risk and investment objectives. The four categories of ULIP funds include:

• Equity Funds

Here, the primary investment made is in company stocks and equity. Equity-oriented funds are high-risk funds and are best-suited for investors with a high-risk appetite. According to the thumb rule, high-risk investments earn high returns. However, the primary aim here is capital appreciation.

• Income and Bond Funds

Here, the funds are invested in fixed income instruments, government securities and corporate bonds. These ULIP investments offer moderate risk and return.

• Balanced or Asset Allocation Funds

These funds are one of the most stable amongst all. These ULIP funds are basically a combination of equity-oriented funds and fixed interest instruments. The invested capital is distributed between the high-risk equities and low-risk funds.

• Cash Funds

These are also known as money market funds or liquid funds. Here, your invested capital will be dedicated to low-risk money and short-term market instruments such as bank deposits, treasury bills, and commercial paper.

Types of ULIP Funds Categorised by Purpose

ULIP investments can be categorised based on the purpose they serve. It includes:

• ULIPs for Wealth Creation

This plan is established to build wealth over time. ULIP for wealth creation is for young investors who can build a corpus to accomplish their future financial goals.

• ULIPs for Retirement

You have to contribute towards this ULIP plan when you are working a job. It will gradually build a corpus for you when you retire. The amount that is collected is then paid to you in the form of annuities during your retirement age.

• ULIPs for Child’s Future

Parents always want to ensure that their child’s future is financially secure. ULIPs for a child's future offer money to the children after they achieve significant milestones in life. In other words, the plan gives the money in instalments at specific intervals.

Here, all the financial requirements of your child’s future are taken care of, even in your absence.

Types of ULIPs Categorised by Death Benefits

Types of ULIP Plans can be broadly divided based on 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 the 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 offer 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 more considerable death benefit as compared to a Type-II ULIP plan.

However, the premium for the Type-II ULIP plan is relatively higher as the insurance company assumes higher risk from the policyholder.

Features of ULIP

The most convenient feature of ULIP is the policy’s premium payment method. Here’s a walkthrough on the same.

• Single-Premium Payment: You are liable to pay the entire ULIP premium as a lump sum amount in one go. This is usually done at the start of the policy term.
• Regular Premium Payment: Here, you have to pay a predetermined premium amount regularly (annually, monthly, quarterly), depending on the term opted.
• The Number of Premium Paying Years: Ideally, the policy term and the years of premium payment is the same in ULIP. However, most insurers in India allow you to decide the number of premium payment years at the time of policy purchase.

Benefits of a ULIP 

• Tax Benefits

 The premium paid on ULIP investments are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. An amount up to ₹1.5 lakh paid as annual premium is exempted from tax.

Further, the maturity benefit is also exempted from taxes under Section 10 (10D). Read more about ULIP tax benefits at Bajaj Markets to understand why this is a great investment avenue.

• Flexibility

ULIP plans help you meet your financial goals. You can invest in equity funds, debt funds, or a combination of the two. However, ULIP plans also give you the flexibility to switch from equity to debt and vice versa.

So, in case you feel that your investment portfolio is not producing desired returns, you can make changes to it and hope to yield high returns.

Moreover, you can invest additional capital over and above your existing premiums. This can be done as and when needed, depending on your financial conditions.

• Transparency

Important indicators like charge structure, the value of the investment, and the expected rate of returns, will be shared by the insurance company before you buy a ULIP plan.

• Liquidity

With ULIP plans, you get an option of partial withdrawal in the policy. With this option, you can manage emergency expenses, family vacations, a child's education, and more. Generally, the partial withdrawal option is free and can be availed after the lock-in period is over.

• Market Linked Returns

You also enjoy high profits from market-linked ULIP returns. This is possible because a portion of your premium is invested in funds of your choice. These funds could be either equity-oriented, debt funds, or a combination of the two.

ULIP Lock-In Period

The Insurance Regulatory and Development Authority of India (IRDAI) has made several changes in ULIP terms and conditions since 2010. One of the significant changes made to the policy was to increase the lock-in period from three years to five years. Since ULIP is primarily an insurance product, staying invested in it for a longer duration is beneficial for the investors. Therefore, a minimum of a five-year lock-in period will help you reap reasonable ULIP returns.

ULIP Charges

Here are a few ULIP fees and charges that you need to be aware of before investing in the policy.

• Fund Management Charges – These are the expenses incurred when managing your funds. Generally, they are charged as a percentage of the fund’s value and are deducted before the Net Asset Value of the fund is derived.

• Discontinuation Charges – This fee is applicable if the policyholder decides to discontinue the ULIP scheme before the lock-in period of 5 years is over.

• Mortality Charges - This charge is levied monthly as compensation for the insurance company in case a policyholder does not live up to the assumed age.

• Surrender Charges – This fee is applied in case of premature full or partial withdrawal of units. These charges are a percentage of the fund value and depend on the year in which the ULIP policy is surrendered.

• Premium Allocation Charges – This fixed amount is deducted from the premiums paid. Generally, premium allocation charges are higher in the initial years of the policy. However, the amount may vary depending on whether the policy is a single premium plan or a regular plan, the amount of the premiums paid, premium frequency, and payment mode.

• Policy Administrative Charges – This amount is charged for the administration of your policy every month. Generally, they are deducted by canceling units proportionately from the fund you have chosen to invest in.

• Fund Switching Charges – Depending on your financial goals, you can switch between the funds. Your insurer gives you a fixed number of switches for free. Otherwise, each switch is chargeable, and these charges are deducted by canceling units proportionately from the fund you have chosen to invest in.

• Partial Withdrawal Charges - ULIPs allow a partial withdrawal facility after the completion of the five-year lock-in period. While some insurers offer unlimited partial withdrawals, some restrict this facility to up to 2-4 free withdrawals. It is best to check with your ULIP provider regarding the same.

You can read more about ULIP Charges and fees on Bajaj Markets. Besides, if you are now keen on buying a ULIP, consider the following factors that will encourage you to make an informed decision

Things to Consider as an Investor

Here are a few things that you can keep in mind before investing in ULIPs.

1. Your Personal Financial Goals

If your primary financial goal is to build wealth over time and have sufficient funds by the time of retirement, ULIP should be your go-to investment strategy. To choose the type of ULIP that will fulfil your needs, answer these few questions:

• What are your future financial goals?
• What is your current financial situation?
• What are your expenses?
• Do you have any other savings?

Answers to these questions will allow you to understand your financial requirements, based on which you will be able to select the right ULIP investment.

2. Compare ULIPs Available in the Market

Once you know your financial goals and the type of ULIP investment that will help you accomplish the same, the next thing to do is intensive market research. Today, several insurers provide the same type of ULIPS, making it all the more imperative to select the right and trustworthy provider.

You can compare the ULIP from different providers based on the policy cost, premium payment options, features and benefits, fund performances, etc. Also, consider the ULIP return rate usually provided by the insurer.

3. Risk Factor

It is imperative to note that since ULIPs are not diversified, the risk involved in the investment component of the policy is high.

Withdrawal Rules in ULIP

ULIP gives you two withdrawal choices:

• Withdrawal Before Completing the Lock-In Period

Every ULIP comes with a five-year lock-in period. So, ideally, you cannot make any withdrawals from your policy until the completion of this lock-in period. However, if you make a partial withdrawal or wish to take the entire amount invested in ULIP by surrendering the policy or not paying the premium, you still won't be able to access your cash until the lock-in period is not over.

• Withdrawal After Completing the Lock-In Period

You can withdraw money from ULIP after completing the five-year lock-in period. However, some terms and conditions are applicable on these withdrawals. These include:

• Limit on Withdrawal Amount: If you withdraw a significant amount from your ULIP, chances are that your life insurance cover will be terminated. Additionally, the withdrawal limits may differ from insurer to insurer. Some permit withdrawal of up to 10% of the premium paid, while for a few others, this can be up to 20%. The limit can also depend on the fund value post-withdrawal.

• Withdrawal Rules for ULIP Top-Ups: Those who opt for ULIP premium top-ups and then plan to withdraw an amount know that the insurer will settle the same from the top-up amount. However, note that the withdrawal amount is not settled from the top-up if the policy is yet to complete its lock-in period.

ULIP vs Mutual Funds vs PPF

Between ULIP, Mutual Funds, and PPF, investing in ULIP helps diversify your investment portfolio. The following table summarises why investing in ULIPs over/along with other investment options should be your go-to financial strategy..

ULIP Income Tax Benefits

ULIP investments provide several features and benefits that you can avail. However, the highlighting factor of the instrument is its tax benefits. Along with building your wealth over time and securing your family’s financial future, ULIPs allows you to save money on tax.

Here’s a quick overview of ULIP tax benefits:

Conclusion

You must have an in-depth understanding of any financial instrument before investing. And the same goes for ULIPs. Now, if you are looking for ULIP plans, then browse through Bajaj Allianz ULIPs available on Bajaj Markets.

You can benefit from features such as partial withdrawal of funds, alter premium payment frequency, rider options, and more. Some plans also offer features like the return of mortality charges, return enhancers, loyalty additions, fund boosters, and more.

Best ULIP Plans Available At Bajaj Markets