Ulips

Unit-linked insurance plans (Ulips) have become one of the most sought after insurance products. They work not just as insurance instruments but also as investment vehicles

Deepti Bhaskaran

What Are Ulips?
Unit-linked insurance plans, or Ulips, are life insurance solutions that provide for investment by actively investing in equity as well as debt products.
Insurance
A part of the premium that the policyholder pays goes into buying him a life insurance cover. In traditional policies, the sum assured chosen by the policyholder decides the premium. In Ulips, however, premiums decide the sum assured that can be opted for. For instance, a policy could say that the sum assured could be 5-30 times the premium chosen by the insured. The minimum term in Ulips is five years.
Investment
After deducting the mortality charge (for the life cover) and other charges, the premium is invested in various fund options that range from pure equity to pure debt products. A daily net asset value, NAV, helps the policyholder keep track of his fund value. As insurance is a long-term product, there is a lock-in period of three years. Partial withdrawal or policy closure and withdrawal of the entire amount is possible only after three years.
Types
There are two types of Ulips. Type I Ulip returns the higher of the fund value or the sum assured upon the death of the policyholder during the term of the policy. Type II Ulip, which is generally costlier in terms of the premium than Type I, returns both the sum assured and the fund value on death. The policyholder gets only the fund value on maturity if he survives the term in both types of plans.
Transparency
A defining feature of Ulips is that their costs are transparent and stated. Typically, there are charges for mortality, fund management, premium allocation and administration. Both the policy document and the benefit illustration show the manner in which these costs are deducted. Ulip is the most transparent insurance product as it clearly mentions the amount of premium that goes into meeting its costs, the amount that is invested and the value of the fund.