ULIP: An Introduction

ULIP(Unit Linked Insurance Plan) is a category of goal-based financial solution that combines the safety of insurance protection with wealth creation opportunities. In ULIPs, a part of the investment goes towards providing us the life cover and the remaining   portion of    the ULIP is invested     in a fund     which in turn invests in stocks or bonds; the value of      investments      alters with the performance of the underlying fund (equity or bond or in both) opted by us .The ULIP plan offers flexibility and transparency.

 When we decide the amount of premium to be paid and the amount of life cover we want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product. The rest of the premium is invested in the fund or mixture of funds chosen by us.

 Since the fund of our choice has an underlying investment – either in equity or debt or a combination of the two – our fund value reflects the performance of the underlying asset classes. At the time of maturity of our plan, we are entitled to receive the fund value as at the time of maturity.

SOME TERMS ABOUT ULIP PLANS

 Net Asset Value

The fund has particular value associated to it which is better known as Net Asset Value.Net Asset Value is the market value of the fund less the liabilities divided by total number of units. Before buying a ULIP, take a look at NAV of the funds available with the particular insurer. The NAV will tell us about the growth the fund has been getting in past days.

Ex: An insurer has equity fund with NAV of 11.5. The fund has been operating from 5 years and the growth has been 15% which is considered as good where as another fund NAV is 9.5 and has been operating from 8 years that means the growth has been negative. 

 Fund Management

Return on the ULIP Plan depends on the management of your fund. So, company hires the Fund manager to give better return to their customer. Fund manager manages the fund by taking care of the factors such as risk & cost.

 Charges and Expenses

There are different charges that can be levied by the insurance companies, some of the more common ones are: Initial Charges, Annual Charges, Investment Charges, Surrender Charges and administration charges.

Initial charges

Initial charges are applied at the time of setting up the policy; this could be in the form of a bind offer spread and also in the form of allocation of units known as the allocation factor.

 Annual charges

The annual charges can either be fixed or can be linked to the size of the fund. It could also be linked to the number of members in the scheme. This charge is usually taken to cover the maintenance expenses of the insurer.

Investment charges

A fund management charge is levied to take care of the fund management expenses depending upon whether the fund is managed internally or externally.

Surrender Charges

The surrender charges can be used in multiple ways. It could be used as a way of recouping the initial outlay of the insurer in case the company decides to withdraw in the early years of the contract or it could be used as a deterrent for the company to shift the service provider at any point of the contract. Usually the surrender charges/ penalty would decrease over a period of time and would be expressed as a percentage of the fund.

Administration Charges

The unit –linked policies are significantly complex to administer and also would need a very highly technically trained customer service department to handle enquiries. As the allocation of units would be time dependent it is extremely important to have a very robust system that can take care of allocation, de allocation and reallocation of units. It is essential to have a system that would be able to talk/ interact with other systems to capture the unit price details, to give outputs to accounting packages, report generators etc.