When you are planning your finances, you might be looking for investments that provide returns to fulfill your future goals. Along with that, you would also need life insurance that secures the future of your family in your absence. Since these are two key financial goals, an individual usually invests in different instruments to achieve them. However, tracking and having multiple financial products becomes difficult. Also, along with the increase in everyday expenses, one might struggle to pay regularly for their insurance while investing on the side. This often leads to one of the two goals being sidelined or delayed. However, there is a unique plan which offers you both, life insurance and investment opportunities, in a single plan. It is the Unit Linked Insurance Plan (ULIP).
ULIP is a unique product offering life cover and investment returns in a single plan. You have to pay premiums similar to any other life insurance. However, here in ULIP, the premium is utilized differently. The premium that you pay is partially used towards providing you with life insurance and partially invested in funds of your choice.
You can choose the funds that you want to invest in based on your risk appetite and your financial goals. There are several funds that you can choose from, but they are broadly divided into three major categories: equity, debt, and balanced funds. You can use a ULIP calculator to get an estimate of the returns you are likely to earn on your funds.
The life cover component works like any other life insurance. Within the duration of your ULIP plan, if the policyholder loses their life, the nominee will receive the sum assured or the fund value of the investment, whichever is higher.
Common terms you should know before buying ULIP
When you are buying a ULIP, you will come across some terms. You must know the meaning of these terms so you can understand your plan better. Here are the common terms that you should know:
Sum assured is the amount of life cover that is agreed upon by the policyholder and the insurance company. In case of the demise of the policyholder, the nominee receives the sum assured.
A fund value is the value of an investment fund option and is measured in terms of units.
A contract is a policy document that is mutually agreed upon by the two parties, the policyholder and the insurance company.
A ULIP that is purchased by a single, lump-sum premium is known as the single-premium contract.
When the policyholder has bought a ULIP and is making regular interval payments for it, their ULIP contract is known as a regular-premium contract.
The lock-in period is the time when the policyholder cannot withdraw any funds from their ULIP investment. It is of 5 years.
A partial withdrawal is when the policyholder decides to withdraw some of their investment after the lock-in period.
Fund switch is an option that allows policyholders to switch between different funds anytime they want.
Premium redirection is when the policyholder decides to redirect their premium to a different fund than the one that they were investing in previously.
The additional amount that the policyholder has agreed to pay for getting an additional cover is known as a top-up premium.
The fund value that the policyholder will receive when their ULIP matures is termed maturity benefits.
Surrendering a ULIP contract means irrevocably exiting the contract terms before the policy has matured.
When the policyholder decides to surrender their plan, the amount that they receive is known as surrender value.
Above are some of the common terms that you will come across while purchasing ULIP. Ensure that you read the fine print and know all the terms and conditions before entering into a contract. Also, use tools like a ULIP calculator before purchasing a ULIP to get an estimate of the returns you are likely to earn on the funds you choose.