ULIPs are some of the most popular investment options today, drawing people with moderate or low-risk appetites and offering a potent combination of insurance and investment. Yet, before venturing into these investments, one should clearly understand the important terms related to ULIPs. Since ULIPs are a hybrid product, they can sometimes seem challenging to understand, although that is not the case. This glossary will go a long way in helping you comprehend ULIPs and choose the right policy for accomplishing your future goals.
An Insight Into ULIPs
ULIPs are dual-benefit schemes, i.e. they offer life coverage with opportunities to earn returns from investments in market-linked instruments. They are excellent long-term investments and come with a lock-in period of 5 years. Additionally, they are eligible for tax deductions under Sections 80C (annual premiums up to ₹1.5 lakhs exempted) and 10D (maturity/death benefits exempted, given the total yearly premiums do not exceed ₹2.5 lakhs) of the Income Tax Act of 1961. They ensure sufficient financial protection for the family while keeping you on track towards achieving your future financial objectives.
You can always use an online ULIP plan calculator to determine the approximate returns over a particular tenure. However, before choosing a ULIP, there are some terms that you should know more about. This will help you take better decisions while investing while giving you better insights into your policy agreement as well.
Key Terms That You Should Be Aware Of
Some of the key ULIP terms for investors include the following:
- Sum Assured- This is the fixed amount guaranteed as a lump sum payout to the policyholder’s family in the event of their demise within the policy tenure. Investors should ensure that the sum assured is sizable enough to safeguard the financial futures of their nominees/dependents in case of any unforeseen mishap.
- Net Asset Value- NAV or Net Asset Value indicates the value assigned to one unit of the investment made in the ULIP. Any fund that pools money contributed by several investors will be divided by the number of outstanding fund units. The NAV for any fund will be the price of one such unit.
- Fund Value – Fund value means the cumulative value of the investment you have made until a particular date. This figure can be determined by multiplying the number of units you have by the net asset value (NAV).
- Premium – It is the amount you have to pay to purchase and continue the policy and its benefits. You can choose the frequency for premium payments, i.e. monthly, half-yearly, quarterly, or annually, based on your convenience. Defaulting on premium payments will lead to the policy lapsing, and you will lose the life coverage and all the added benefits in turn.
- Death Benefit – This is the cumulative amount that the insurance company will disburse to the policyholder’s nominee upon their death within the policy tenure. The death benefit varies based on the types of ULIP (Type I or Type II). It will be the higher one of either the fund value or the sum assured in Type I, or both the fund value and sum assured combined in Type II. Nominees may sometimes get the death benefit through monthly instalments or as a lump sum payout.
- Maturity Benefit – This is the amount given to policyholders upon the expiry of the policy duration. It is also free from taxation under Section 10 (10D) of the Income Tax Act of 1961. Please note that the combined yearly premiums for your ULIPs must not exceed ₹2.5 lacs annually. The maturity benefits will be taxed under Capital Gains Tax if it does.
- Riders – These are add-ons to policies and offer extra benefits, subject to the payment of an additional amount. They also boost the overall coverage inclusions and their value. A few common ones include accidental death/disability, critical illness coverage, waiver of premium, and more.
- Fund Switching Options – ULIPs come with options where investors may switch across a diverse pool of funds listed by the insurance provider for their policies. This can typically be done up to a specific number per year, which will be stated in the policy document.
- Lock-In Period – This means the time until which investors cannot withdraw their invested amounts. This is set at five years for ULIPs. If the policy is surrendered within the lock-in period, the invested amount will be transferred to another discontinuation fund. You may withdraw the amount partially after the completion of the lock-in period.
- ULIP Returns – These indicate the returns on the investments made in various funds by ULIPs. They will depend on your choice of funds, strategy, and market conditions.
- ULIP Charges – These are associated costs that investors must bear under their policies. They include mortality charges, fund management costs, and policy administration fees. Most of these charges are capped by IRDAI (Insurance Regulatory and Development Authority of India) so that their impact on the returns is minimized in the long term.
- Top-Up Premium – They indicate an extra sum the investor can pay over and above the base premium amount. This is paid whenever the investor wishes to scale up either their coverage or the investment amount in various types of funds under the policy.
You should understand these terms before signing on the dotted line. They will help you make more sense of your ULIP agreement while getting a clearer picture of the costs and benefits involved.