Uncertainties in life compel individuals to seek financial stability. And, especially, the current pandemic scenario forced people to make the decisions sooner! Well, smart investment decisions became a priority while life coverage became mandatory for ensuring your family's financial future in your absence. So, is there a financial product that offers both the benefits?

Certainly, yes! ULIP is a life insurance comprehensive solution for life cover and market-linked returns. So, how is the premium utilised in a ULIP policy to provide the desired returns? Here is a detail about it.

What is ULIP Plan?

ULIP is referred to as the Unit Linked Insurance Plan. It is a comprehensive life insurance plan that provides two benefits.

First, it offers life cover. It is the death benefit offered to your loved ones in case of your unexpected demise.

Second, it provides an opportunity to help you invest in financial securities for market-linked returns. The policy has a five-year lock-in period after which partial withdrawal will be permitted. Hence, it is one of the best options for a long term investment.

How Does ULIP Premium Get Utilised? 

As we have seen, a ULIP plan functions for dual purposes. Hence, one portion of the premium is utilised as a life cover to provide the sum assured to your family. And, the other portion is invested in the financial market.

The investment made in the financial market will be based on your risk appetite. For example, there are equity funds for people who can accommodate high risk for receiving high returns on investment, debt funds for low-risk seekers and hybrid funds for people planning to invest in medium-risk securities. Therefore, the amount you invest is used to purchase funds based on your preferences. You can choose to diversify by purchasing funds in different categories as well.

As a policyholder, you will be allocated specific units of the fund based on the proportion of the amount you have invested. It will decide the proportion of premium utilised for the ULIP investment. If you have diversified the portfolio by choosing different funds, then the premium utilisation will also be based on the proportion of allocation made in different funds. The value of each unit is referred to as the Net Asset Value. You can track the performance of your investment based on this NAV. The sum of the value of all the units based on the funds you have chosen will be the total payout on maturity in the ULIP plan. 

ULIP investments also provide the option to switch between the fund choices during the policy term in case of unfavourable market conditions. For instance, if you have a high-risk profile and have invested in equity funds, you can choose to switch to debt funds and secure your investments. The premium utilisation will change based on the new fund chosen and the extent of investment made.

Our Tata AIA ULIP plans provide up to 11 fund options with varied risk profiles. You can choose to make a lump-sum payment or make the premium payments periodically for a limited term. There is also the choice of systematic investment through the Enhanced SMART(Enhanced Systematic Money Allocation and Regular Transfer) portfolio strategy. It provides you with an opportunity to enter the highly volatile market in a structured manner. You can use the ULIP premium calculator to decide on the amount you can afford to pay based on your financial requirements and the steady flow of income.

ULIP  Investment Charges

ULIP investment is based on market-linked returns. Therefore, you have to pay charges to the insurance provider to manage your funds in the long term. Here is a brief about the charges

1. Mortality charges are levied based on the risk covered during the policy tenure. It is subject to change during policy renewal based on the age, sum assured and the policy term. The units you have invested in will decrease in proportion with the charges of the chosen ULIP plan. Many insurance providers offer the deductions made during the policy as an addition to the total fund value on maturity.
   
   
2. Premium allocation charges are a percentage of the premium payment you make and are thus deducted before the actual investment is made.
   
   
3. Fund management charges are levied based on the value of assets and will be proportionate to the NAV of the fund.
   
   
4. Policy administration charges are included as part of servicing your policy.
   
   
5. Switching charges are deducted when you switch between the fund options over and above the free switches allowed in your policy.
   
   
6. A partial withdrawal charge is levied during the policy term when you make a partial withdrawal after the five-year lock-in period.
   
   

Though a unit-linked insurance plan premium includes such charges, it is always considered a fair investment choice considering the flexible benefits and life cover provided as part of the plan.

Conclusion

ULIP investments provide dual benefits, the life cover and the market-linked returns. In addition, it offers the option to help you invest in funds based on your risk profile. You can also choose to switch between options based on the prevailing market conditions. It has a five-year lock-in period and is a good long term investment. Therefore, your premium payment is used to allocate fund units based on the proportion of the investment chosen and made.

Insurers will also use it to accommodate ULIP charges such as the fund management charges, premium allocation charges, etc. Therefore, ULIP investments have a great benefit in the long term. It will negate the effects of economic downturns and provide a huge benefit on maturity, equating to the inflation rate with effective utilisation of the premium!

L&C/Advt/2022/Jun/1117