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Insurance plans are of three kinds: ULIP, Traditional and Term Plans. We will be discussing only ULIP plans in this article.

ULIPs are conceptually same as Mutual Funds. But there are important differences that an investor needs to understand before deciding his investment plan. To know those differences click here.

Unit Linked Insurance Plan, as the name suggests, is a insurance plan plus a investment for future. How do ULIP differ from traditional insurance plan? According to my personal opinion ULIPs are same as traditional plan but with more transparency and also flexibility for the customer.

A typical ULIP plan will insure your life for a sum assured over a certain duration.

Sum Assured: The money that the insurance company guarantees to pay to the nominee, in case of death of the insured person.
Premium: The money that the insured person needs to pay to the insurance company, yearly, for the guarantee of the sum assured during the defined period.
Duration: The time for which the guarantee is valid.

Sum assured could be anywhere between 10 to 100 times of the yearly premium.

How does the premium get invested?
A part of money that you pay as premium is taken by the insurance company as Premium Allocation Charges. These charges may vary between as low as 5% to as high as 70% of the first years premium. The remaining part of the premium is invested, on your behalf, by the company.

The money the company invests is in terms of units. That is, the money is used to buy units of one of the funds run by the company. The price of each unit of a fund is declared by the fund management company on a regular basis. The price at which the units get bought, is the price of the unit on the day, the premium get allocated in your insurance account.

What is fund value and how is it calculated?
Value of your fund, Fund Value, is calculated by multiplying the number of units in your account with the current unit price. Fund value minus exit load, if any, is the amount of money that the insurance company will return when you wish to withdraw your money from your ULIP plan.

What is fund switching? or How can ULIP be used to time the market?
Most of the insurance companies offer their customers, the choice of funds to invest in. These different funds give different kind of risk exposure.

1. Aggressive funds: mainly put money into equity thus can give good return but come with some risk.
2. Conservative funds: mainly put money into money market, are safer but give low returns.
3. Balanced funds: Tries to make a balance between returns and safety.

Most insurance plans allow the client to switch between funds. This allows the client to time to market. Switching between funds need not always be free.

What annual charges are levied by the company and how are they deducted from the fund?
Insurance company deducts mortality charges regularly from your invested fund. Mortality charges is the price that the insurance company charges you to provide you with insurance. This charge is directly proportional to Sum At Risk. Sum at risk is the amount that the insurance company risks paying the nominee, from its own pocket, in case of death of the insured person. Sum at risk is generally calculated by subtracting fund value from sum assured. Mortality charges also increase with the increase in age of the insured person.

Administrative charges, which are generally 5% per year, are also deducted from the fund.

Both administrative charges and mortality charges are deducted in terms of units. Number of units to be deducted is decided by dividing the amount to be deducted by the NAV of the unit.

What are tax benefits of investing in ULIPs?
The amount of premium paid, not more than 20% of the insured amount, can be considered under 80C. If the annual premium is less than 20% of sum assured, the returns from the ULIP plan are also tax free.

This article contains very basic information about ULIPs. If you find anything wrong or missing please feel free to comment on the article, we will try to accommodate it.

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Meta: April 10th, 2009 by admin
Tags:   Fund Value · insurance · Kotak Life Insurance · NAV · ULIP · unit linked insurance planNo Comments