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What Is A ULIP Insurance?
A unit linked insurance plan is a hybrid between insurance and a mutual fund. You might ask What Does A Hybrid Product Do? This basically combines the good properties of two different products to form a single product which is meant to have the good properties of both the products .Similarly ULIP's combines Insurance protection with the Investment component. This product is tailor made in which the consumer decides the premium to be paid as well as the sum assured. These ULIP Policies are more profitable than traditional insurance policies but carry a higher element of risk. The policy holder decides the proportion of the investment component vis-a–vis the insurance component. This transfers the risk element solely in the hands of the policy holder.
Why Would You Take Up A Unit Linked Insurance Plan?
· You would take up a ULIP Policy as it guarantees you a sum assured according to terms and conditions of your policy as long as premiums are payed and the policy is in force.
· ULIP's have a market linked component and this helps you to generate returns which beats the rate of inflation This is not guaranteed but since it has a market linked component chances are high that you would get more returns than most of the traditional financial instruments.
· You can take loans against these ULIP policies but the quantum of loan depends on the sum assured or the fund value of the policy and number of years for which the policy has been in force.
· If ULIP is Equity oriented you cannot take loans on more than 40% of the ULIP's Net Asset Value. In case of debt oriented ULIP's the limit increases to 50%.
· If you are paying a premium of less than 10% of the sum assured then it will be tax deductible Under Section 80 C of the Income Tax Act. Premium for ULIP's will be tax deductible provided the premium should not exceed 1 Lakh.
· Under Section 10(10d) the death benefits on ULIP's will be tax free in the hands of the nominee and any proceeds received from ULIP's on its maturity will be tax free in the hands of the receiver.
How Does A Unit Linked Life Insurance Policy Work?
· The investor has to choose from a set of standard portfolios depending on his risk appetite. These may be aggressive such as those which have a high equity component, a conservative portfolio consisting of a mix of debt and equity and a very high debt component for those who are risk averse. The percentage of debt and equity can vary up to 100% depending on the investors risk perception or capabilities.
· The investor pays a premium and charges are deducted from this premium. Units of the chosen portfolios are taken up by the investor in a similar way to mutual fund units. This follows a pattern similar to a collective pool in a mutual fund .The money collected is invested in a predefined financial instrument which might be shares, debentures or money market instruments.
· A small part of the premium is set aside to provide the guaranteed health cover or the mortality cover and the life cover. On the death of the policy holder the sum assured is paid to the beneficiary.
· The income is gained by the unit holders in proportion to the units held by them. This is indicated by the Net Asset Value of the fund which rises or declines in lieu with the market. The product of the Net Asset Value of each unit and the number of units held gives the value of the policy.
· They have a compulsory lock in period of 5 years and withdrawal is not allowed for the first 3 years of the policy.
· They offer a guaranteed rate of return of 4.5% per annum on the premiums paid.
Types of Unit Linked Life Insurance Policies
Type 1 ULIP Policy
This policy basically charges a premium where a portion of the premium is set aside as an assured death benefit. The remaining portion is mainly used for the investible corpus?. What happens if you die during the course of this policy? Will you get both the components of the ULIP?.This policy on the death of the policyholder pays either the assured death benefit or the investible corpus whichever is higher. It retains the lesser amount among the two for itself. If you find that the investment portion is same as the assured death benefit you can raise the portion of the death benefits. However the increase in death benefits is subject to medical tests in order to gauge the health of the policyholder. You need to note that under such a policy charges are deducted from your premiums and if the investible component is lesser you get only the sum assured. This translates to a very expensive policy.
Type 2 ULIP Policy
This works in a similar manner to the Type I policy the main difference being the premiums are higher. The higher premiums are due to the fact that these policies pay both the assured death benefit as well as investible corpus on the death of the policy holder .Just like any ULIP Policy you have to bear the losses in case the fund underperforms and you can still choose your policy based on the premiums payed and the sum assured. If you surrender these plans early owing to higher costs of premiums your surrender value is almost nil.
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