Introduction

In this article I will be writing about the ULIP insurance plan. In our previous articles we have
learn about the term insurance or life insurance plans and the endowment insurance plans.
ULIP is the one kind of insurance plans which is linked to the investment options. Many people
prefer to invest on the ULIP plans because it yields better return. I will explore the advantages of
the ULIP insurance plans in details. If you like the article, please subscribe to our future articles
here.

Related Articles on ULIP

 Difference between insurance and investment

 SEBI Bans 14 Insurance Companies to sell ULIPs
 Why ULIP’s are not good choice?

What is ULIP?

ULIP stands for Unit Linked Insurance Plans. As we know that insurance is for protecting our
life from the any uncertain events like death or accident. The purpose of the normal insurance plan
is just protecting the life but not ensuring any savings for the future. The example for the pure
insurance plans are term insurance. Many people wanted plan which gives protection also gives
the returns for their investment. So, insurance companies come up with the ULIP plan where the
premium amount is invested in the stock market and returns better income on the maturity
period.

What is the difference between ULIP and Mutual Funds?

In structure both ULIP and Mutual Funds looks similar. But, in objective they are different.
Because of the high first-year charges, mutual funds are a better option if you have a five-year
horizon. But if you have a horizon of 10 years or more, then ULIPs have an edge. To explain this
further a ULIP has high first-year charges towards acquisition (including agents’ commissions). As
a result, they find it difficult to outperform mutual funds in the first five years. But in the long-
term, ULIP managers have several advantages over mutual fund managers.  Since policyholder
premiums come at regular intervals, investments can be planned out more evenly.  Mutual fund
managers cannot take a similar long-term view because they have bulk investors who can move
money in and out of schemes at short notice.

From October 2009, IRDA has set the maximum fees amount to be levied against the
ULIP policies. Which makes the ULIP more compete against the mutual funds.

Consider the following points before choosing the ULIP

Policy

 Talk to the agent for more details about the policy. If he guarantee’s any return after ‘N’
years, then you should be careful. Keep in mind that your money is invested in the
market. The returns are purely depends on the market performance.
 Buy the policy with minimum of 10 years. In the long term, ULIP policies give very good
returns.
 If possible, try to analyze the market condition before staring the investment.
 Learn the fundamentals of ULIP policies.
  Don’t buy the ULIP just for the tax savings purpose.
 Compare the different ULIP policies in the market.

Summary

In this article I have explained about the ULIP plan and the purpose of the ULIP. In my next
article I will be writing about the different ULIP plans and how to choose the better plans amount
the many players in the market. Thank you for reading this article!!

Unit Linked Insurance Plans (ULIP)

Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk protection and
flexibility in investment. The investment is denoted as units and is represented by the value that it has attained
called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying
assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk cover
under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. A
Unit is the component of the Fund in a Unit Linked Insurance Policy.

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors have the
option of investing across various schemes, i.e, diversified equity funds, balanced funds, debt funds etc. It is
important to remember that in a ULIP, the investment risk is generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium payments
on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter the premium
amounts during the policy's tenure. For example, if an individual has surplus funds, he can enhance the
contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option of paying a lower
amount (the difference being adjusted in the accumulated value of his ULIP). ULIP investors can shift their
investments across various plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a
nominal or no cost.

Expenses Charged in a ULIP

Premium Allocation Charge:

A percentage of the premium is appropriated towards charges initial and renewal expenses apart from
commission expenses before allocating the units under the policy.

Mortality Charges:
These are charges for the cost of insurance coverage and depend on number of factors such as age, amount of
coverage, state of health etc.

Fund Management Fees:

Fees levied for management of the fund and is deducted before arriving at the NAV.

Administration Charges:
This is the charge for administration of the plan and is levied by cancellation of units.

Surrender Charges:
Deducted for premature partial or full encashment of units.

Fund Switching Charge:

Usually a limited number of fund switches are allowed each year without charge, with subsequent switches,
subject to a charge.

Service Tax Deductions:

Service tax is deducted from the risk portion of the premium.