The Most Commonly Asked Questions about ULIPs

The Most Commonly Asked Questions about ULIPs

The biggest reason you buy an insurance policy is to make sure that your family has financial coverage in the case of any unfortunate event. However, the large number of policies available indicates that there is much you need to know before you buy a policy. There are many plans available that offer more than just life coverage. Based on your needs at varying life stages, you will never run short of options. However, the point is not to have options, but rather to have a policy that both secures your loved ones and makes you financially stronger. The best option in this case is a unit-linked insurance plan. As beneficial as it may be, there are always doubts that one may have regarding ULIPs. Some of these include:

What is ULIP?

A Unit Linked Insurance Policy or ULIP is a combined product of life insurance coverage and investment. Like every other insurance product, you have to pay a premium for the benefits that the policy offers. However, the flow of the premium into the policy is very different in the case of a ULIP. Buying a ULIP allows you to get great life coverage and diversify your money into different investment opportunities.

The reason that this fund is called a unit-linked fund is that it works on something called units. Units are essentially just individual parts of the fund. Each of these units have a face value, which is essentially their monetary value. This value grows and drops as the fund performs well or bad respectively. The monetary value of each of these units is known as ULIP NAV or ULIP Net Asset Value. Similarly, the total amount of money that all your units across various funds are worth is known as fund value.

How ULIP works?

As you already know, ULIPs work on basis of units. The money you pay as the premium is used to purchase units. These units are then segregated into insurance coverage or investment. Each of these units has a face value. Adding up the value of all these units gives you the amount of money you are investing. Once you have invested the money, you will have to wait and see how your funds perform. Depending on whether they perform better or worse, the NAV of each unit increases or decreases respectively. Meanwhile, your insurance coverage remains intact.

After you pay your premium for a ULIP, part of the premium goes towards your insurance coverage. The other part goes towards the unit-linked fund. The insurance provider oversees this fund. The investment goes towards equity and debt investment opportunities. You can choose from a wide array of funds based on your return expectations, investment capabilities, and risk appetite.

How much money will my family get?

There are two scenarios where your family will receive money through ULIP. The first one is when the plan’s duration ends, and the plan reaches maturity. This means that your funds have had all the time possible to grow. At the maturity stage, you would have to liquidate all your funds. This results in a maturity payout for the policyholder. Since the maturity benefit is created by liquidating your investment funds, the valuation of the funds at the time will decide how much money will be disbursed.

The second scenario is of a death benefit. Being an insurance policy, ULIP will cover the family of the policyholder. At the time of the policyholder’s death, the insurance provider will settle your claim through either of two options. The first option is that the family will receive the sum assured set in the policy. The second option is the one where the insurance provider pays your family the fund value of your investment. Depending on the situation of your investment fund, the choice between either of the two is made. The insurance provider compares which of the two options is higher in monetary value. The higher option is then disbursed to the family.