Life Insurance - Understanding the working of ULIPs
14-Jun-2006
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It is a know fact that investments in market requires an individual to have a good risk appetite. The recent yo-yo performance of the market has led many investors to think over again on their investment portfolios. Interestingly, the downfall of the market has not had a negative impact on the Unit Linked Insurance Plans (ULIP) owners.
ULIPs, also known as investment plans is a perfect package that comes with insurance coverage and investment options. So, that leaves you with the opportunity of investing in equities. But you do need to keep in mind that the investments in stocks are subject to the vagaries of the market. The volatility in equity markets can keep you uneasy and disturbed since you wouldn't like to see your reserve being affected. You need to know your risk appetite and then make a choice accordingly by choosing an appropriate fund.
Given below are points that explain how ULIPs function:
Expenditure:
ULIPs include expenses of fund management charges, annual expenses, etc. The expenses are taken care of by the premium amount that is paid by the policyholders. The higher the fund management charge, the higher is the cost spent from the premium amount.
How does ULIP function:
Unit Linked Insurance Plans function differently. The combination of insurance plus investment in funds is what ULIPs offer. ULIPs have an investment mandate, which permits them to ‘move’ assets without restraint between equities and debt. This feature is not available in other plans like endowment, money back, term policies. The monies invested in funds are used by the insurer to invest in specified instruments like bonds and government securities (G-secs). The amount of money invested in equity has the potential to make a momentous difference to the returns that the plan can create over the long run.
Since ULIPs invest heavily in equity market, the returns can come crashing down during downfall of the stock market.
Other features:
An innovative aspect of ULIPs is the 'top-up' facility. A top-up is a one-time additional investment that is paid apart from the annual premium of the policy. This feature works well when you have a surplus that you are looking to invest in a market-linked avenue. ULIPs also have the facility that allows you to skip premiums if you have paid your premiums regularly for the first three years. For instance, if for some reason you have missed on paying your premiums, the insurance company makes an adjustment to keep your policy alive. Such a facility is not available with any other policy. Another important feature of ULIPs is that the portfolios are disclosed regularly. This gives you an idea of how the money is being administered. What more, it qualifies for tax benefits which is offered under Section 80C of the Income Tax Act. This is subject to a maximum limit of Rs 1,00,000.