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Benefit illustration explains the insurance coverage and definitions of the technical terms used in the policy. To read the illustration, one must know some of the basic terms such as net yield, mortality charges, etc.
A Unit Linked Insurance Plan or ULIP# invests your money in the stock market2; debt, equity and other fund options. The insurance illustration of your ULIP plan is its narrative summary designed to inform you about the policy.
As per the new guidelines of the IRDAI (Insurance Regulatory and Development Authority of India), all life insurance companies must offer a benefit illustration of the ULIPs to all potential buyers.
How to Read the Benefit Illustration Insurance Details: Basic Guidelines
A section of the benefit illustration includes personal information like your name, age, and other details such as premium, policy term, and maturity age. It also outlines the allocation of funds.
The first column in the benefit illustration represents the annualised premium amount, while the subsequent column reveals the 'premium allocation charge' (PAC). The column immediately following shows the amount available for investment.
Similarly, additional columns display various other charges, including policy administration charges, fund management charges, mortality charges, and service tax, all subtracted from the premium.
For guaranteed1 ULIPs, there is a designated column showing the amount that is compulsorily added to the fund value.
The last three columns are of significant importance, as they display the fund value, surrender value, and death benefit at the end of each year. In the case of a 20-year term benefit illustration, the policyholder can review the fund value, surrender value, and death benefit for any given year.
Common Terminologies of the ULIP Benefit Illustration: Explained
Policy Year: This term pertains to the duration of your insurance policy or the number of years you remain invested in it.
Annualised Premium: This is the yearly premium amount that you are required to pay. Depending on the terms and conditions of the plan, you can choose to make this payment on a monthly, quarterly, semi-annual, or annual basis.
Premium Allocation Charges: These charges constitute a percentage of the premium you pay upfront. They are deducted, and the remaining amount is invested in the chosen funds.
Policy Administration Charges: These charges encompass expenses not covered by premium allocation charges or fund management charges. They may be expressed as a percentage of the sum assured or as a fixed amount.
Fund Management Charges - These fees are imposed as a percentage of the asset value and are adjusted by modifying the Net Asset Value. They are usually calculated daily.
Mortality Charges: These charges are incurred for providing insurance coverage throughout the policy term. The insurer deducts these charges by cancelling units under the policy.
Note: The exact mortality charge depends on your age, the sum assured, and the policy's term.
Fund Value at the End: This term indicates the fund's value at the end of the year after all charges have been subtracted and growth has been factored in.
Surrender Value: This is calculated after certain applicable discontinuance charges have been subtracted.
Net Yield - The 'Net Yield' column displays the yield after applying charges. It presents separate net yields for fixed assumption growth rates of 4% and 8% (set by the mandate). Net Yield represents the Reduction in Yield (RIY), which is the charges subtracted from the growth rate.
For example, if the total charges amount to 1.75% at an 8% growth rate, the Net Yield is 6.25%, and the RIY is 1.75%. In general, higher RIY values correspond to lower Net Yields and reduced returns, following this logical relationship.
Conclusion
Benefit illustration is an important tool for understanding the returns, fees, maturity, and other important values of your policy. The policyholders can easily read the benefit illustrations by understanding the basic terminologies given in the illustration.
Reviewing the benefit illustration before buying a ULIP plan allows you to envision the potential growth of your investment in the coming years. It can assist you in financial planning to achieve critical life goals.
