Financial planning is an inevitable aspect of everyone’s life. It helps you sail through life smoothly. Apart from improving your earning prospects via employment opportunities, it involves saving money to facilitate major milestones. This requires careful consideration of investment options in relation to your goals to make sure you gain optimum returns.

You can find a range of investment tools, both high-risk and low-risk to choose from. Among them, a ULIP investment plan is a renowned one, which is known to keep you secure and also help you grow money.

ULIP: Meaning and Features

ULIP or a Unit Linked Insurance Plan is a type of hybrid fund that combines insurance and saving. The premium you pay gets distributed in two parts. One portion is spread across market-linked instruments of your choice; the other is saved in insuring your life. The dual benefits provided by a ULIP policy make it an ideal wealth creation tool.

In case you expire during the term of the policy, your family receives either the sum assured or the fund value, whichever is higher. Moreover, the ULIP tax* benefit is multifold - tax* benefits on premiums, returns and death benefit.

In addition to that, you have the flexibility to switch between assets and top-up your investment to maximize your returns. ULIPs usually come with a 5-year lock-in period that allows for disciplined savings, and you have the choice of withdrawing from the plan post this tenure.

Withdrawal from a ULIP Fund

While a ULIP investment is a great source for faster accumulation of savings, there are various factors that play a role in the money you make from it. Life being unpredictable can push you in times when you face a financial emergency. Such times call for reconsideration of your finances and investments. During such times, you might want to either withdraw or liquidate your ULIP plan.

To comprehend the policy valuation, you need to know about the ULIP surrender value. It is the amount you receive from the insurance company when you terminate the policy before it matures. The period could be before or after the lock-in period. When you surrender, you get the sum of what you have saved along with the returns on them. Note that if you end your policy prior to the 5-year period, you will have to incur a surrender charge.

However, before you surrender your policy, it is necessary to find out the amount you will receive as a surrender value. Here, you will have to consider the downside of surrendering the policy. For example, once you surrender the policy, you do not get the surrender value on the surrender date. You will receive the payout at the end of the lock-in period and not only will there be discontinuation charges but you may also be charged a fund management fee since the amount will be placed in a Discontinued Policy Fund.

There are also tax implications of surrendering your policy. An early surrender means that the tax deduction will be accounted for as income and will be taxed accordingly. A TDS will also be applicable to on the surrender value.

Nevertheless, if you choose to surrender your ULIP, you will need to determine the surrender value of ULIP policy, you need to factor in certain charges and elements.

1. Mortality Charge

As mentioned before, a ULIP plan is not restricted to savings but also extends to offer protection to your loved ones in the case of your unfortunate demise. The insurance cover comes at a cost, which is called the mortality charge. It is a fee levied by the insurer to provide coverage on your death and for other expenses that go into the execution of the claim.

It is a minimal amount that is calculated based on various factors, including the sum at risk, which is the sum assured, excluding the value of the fund. It also depends on other aspects such as your age, life expectancy ratio of the nation you reside in, gender, financial status, etc. When you end the policy mid-term, your insurer will give you the sum after deducting the mortality rate.

2. Fund Management Fee of Your ULIP Investment

Every type of investment requires management. Let’s say you invest some portion of your income in certain equity, debt, other types of funds. All of them combined creates a portfolio of your investments, which require continuous monitoring and management to ensure you gain substantial returns. Most of the time, this calls for professional assistance to help you enjoy better rewards.

ULIPs work in a similar way. The money that goes toward investment is divided among various types of assets, which require management. A dedicated fund manager keeps an eye on your investments to make sure they bring you good returns. The management charge is for this provision. It typically falls between the range of 0.5% to 2% of the premium. Be sure to ask your insurer about this charge to arrive at an accurate ULIP surrender value.

3. ULIP Policy Duration

Generally, the longer you stay invested, the bigger the gains you can reap. The rule applies to most funds, including a ULIP investment. If you buy the policy for a longer duration, the valuation of your investment in it will be better. For instance, if you pay premiums for 10 years, the base sum of your plan is higher as compared to a policy tenure of 6 years. Remember that the base amount is calculated after subtracting the mortality and fund management charges. Considering the tenure of your ULIP will give you a rough estimate of the surrender value.

4. ULIP Investment Ratio

As discussed above, you need to consider the ratio of investment while determining the surrender value of ULIP policy. The answer to how much of your premium amount is dedicated toward market securities and life coverage will help you figure out the ratio of investment to insurance. This also includes the insurance cover that your insurance company has kept for you.

TATA AIA Life Insurance provides a range of ULIPs to support you while you achieve life’s important milestones. You can also use the premium and planning calculators available on their website to ensure you get the apt returns on your investment.

L&C/Advt/2022/Aug/1967