Types of Unit Linked Insurance Plans

Unit Linked Insurance Plans or ULIPs, as they are better known, have emerged as the preferred choice of insurance-cum-savings vehicle for many Indians in the last decade. Many investors have invested in ULIPs to meet various financial goals, be it child education planning, house purchase planning or retirement planning. Yet many people have not understood the concept of ULIPs and hence ended up buying the wrong product.

What are ULIPs?

When we talk about insurance as an investment option – ULIPs suit the profile. ULIP is an insurance policy which provides dual advantage of Insurance as well as Investment. Here the premium which you pay is divided into parts – one part (small portion) is used to provide insurance and the other part (the larger one) is used to buy units for investment. Hence it enables the buyer to secure some protection for his family in the event of his untimely death and at the same time provides him an opportunity to earn a return on his premium paid. The value of investments alters with the performance of the underlying fund opted by investor. Hence the investment risk is borne by the investor.

Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Hence investors can decide to invest their money in line with their market outlook, time horizon, and their investment preferences and needs. Different funds have different risk profiles. The potential for returns also varies from fund to fund:

How Do ULIPS Work?

We have seen many investors blindly going for ULIPs without understanding the nature of the product and hence end up getting an unwanted policy

When you decide the amount of premium to be paid and the amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation Charge, and varies from product to product. The rest of the premium is invested in the fund or a variety of funds chosen by you. Mortality charges and ULIP administration charges are thereafter deducted on a periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fund management charges are adjusted from NAV on a daily basis.

Since the fund of your choice has an underlying investment – either in equity or debt or a combination of the two – your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity.

One of the big advantages that a ULIP offers is that whatever be your specific financial objective, there is a ULIP plan which you can choose from:

Equity Funds ULIPS – These ULIPs mainly invest in Equity Stocks. The investment pattern can range from 60%-100%. The investment objective behind investing in such products is to meet long term goals like retirement planning, children’s education planning, marriage planning etc. These investments come with high risk and returns. The minimum investment horizon for such investments should be at least 5 years.

Debt Based ULIPS – Quite contrary to equity investment based ULIPs, debt based ULIPs are more safe and hence returns are very predictable. These investments are normally meant for short term goals or one can utilize this category to shift funds from Equity Funds as the goal maturity comes closer by using the Switch facility. Through switch option, one can move from Equity to Debt fund and vice-versa at any point in time

Highest NAV Guaranteed ULIPS – These are capital guarantee products that ensure that the amount you invest does not lose value and you get some upside of equity also. However it is foolish to assume that you get Sensex-linked return, with zero risk. Moreover, the highest ULIP NAV is only possible if you stay throughout the tenure of the fund. These plans pay the highest NAV achieved by fund units over a specified period of time ranging between seven and 10 years. They work on the constant proportion portfolio insurance (CPPI) model, which, while limiting downside in the event of falling stock markets, also tend to constrict gain and leverage that could be achieved through participation in rising markets. In such plans, given the guarantee, over the policy term, a significant portion of the fund stays invested in debt market instruments. Depending on the percentage of guarantee offered, there is also usually a separate guarantee charge, which lowers the investment component. Such plans will appeal to investors with lower risk appetite who do not mind foregoing higher equity returns and paying extra charges for the sake of guarantee.

In a nutshell, it can be quite a considerable task for a novice investor to choose from the various investment options available. Hence it is always advisable to take the help of a financial advisor before committing your hard earned money.

[source: http://lifeinsurance.bajajallianz.com/tax_insights/lifeinsurancecategories/types-of-unit-linked-insurance plans/?utm_source=helpandsupport&utm_medium=posts&utm_campaign=backlinks]