Unit-Linked Insurance Plans (ULIPs) are life insurance policies with the added benefit of investment. When you purchase a ULIP insurance, the insurance provider uses a portion of your capital to invest in equity, debt, or a combination of multiple funds. It is a long-term investment instrument that helps you create a fortune while ensuring that your dependents’ future is protected.
If you are a new investor, ULIP’s glossary of terms can be a little confusing. Here, we aim to explain some of the standard terms associated so that you can understand the policy easily.
- Sum assured
As ULIP is essentially a life insurance plan, it offers a death benefit to the insured’s nominees if an unfortunate event leads to his or her demise during the policy tenure. The amount is set at the time of policy initiation and is known as the sum assured.
- Lock-in period
ULIPs come with a lock-in tenure of five years during which time the policyholder cannot exit the plan. This benefits you in the long run, as the lock-in period gives your money time to grow.
- Top-up premium
With ULIPs, you have the option to increase your sum assured when your financial liabilities and life goals change. This requires you to pay an additional amount over your regular premium. This sum is known as the top-up premium.
- Net Asset Value (NAV)
A ULIP’s funds are made of units. To ascertain each unit’s value, the insurance provider deducts your associated liabilities from the fund’s total value and divides it by the number of units you own. The determined value is known as NAV.
- Fund value
The fund value of your ULIP is the total worth of the units. If you want to calculate the fund value, you need to multiply the fund’s NAV by the total number of units you own. The fund value indicates the growth of your initial investment.
- Partial withdrawal
Partial withdrawal is a feature of ULIPs that allows you to take out a portion of your fund value when required. However, you can make a partial withdrawal only when the lock-in period is over. Your insurance provider will inform you how many times you can withdraw funds in a year.
- Sales Illustration
The insurance company provides many documents to its customers explaining how the policy functions. One such document is the sales illustration that explains the mechanism of the life insurance policy.
- Fund-switching
ULIPs permit you to choose among equity or debt funds for investment, depending on your monetary goals and risk tenacity. A unique benefit of ULIPs is the fund- switching alternative that lets you reallocate your money as per your changing needs during the policy term. With this facility, you can move your investment from debt funds to equity funds when the financial market performs well. You can also transfer your money from equity funds to debt funds when you are unwilling to take risks. Depending on the insurer, you can avail of this feature for free only a fixed number of times per year.
- Maturity benefit
The ULIP insurance policies come with a maturity benefit, which is the fund value that the insurer pays you at the end of the policy tenure.
- Surrender value
In case you have to surrender the policy during the lock-in period, the insurance company pays you the fund’s current value after deducting certain charges. This sum is called the surrender value. It is suggested that you avoid surrendering the policy before five years unless it is an emergency.
Now that you understand the important terms associated with ULIPs, it will be simpler to buy a suitable policy. You can visit an insurer’s website to find the available ULIPs. Use a ULIP plan calculator to compare the available options and quickly finalize the right one.