Classification of ULIP Plans
ULIP Plans in India can be broadly classified as follows:
Purpose of the ULIP Plan | Retirement Planning | In this plan, the policyholders/insured makes payments by salary deduction, which is automatically collected in a corpus amount, which is paid in the form of annuities to a policyholder after retirement. These plans have withdrawal option, which gives flexibility and tax free income. |
Wealth Creation | This plan primarily helps the insured to accumulate wealth over the tenue of the plan. Recommended for persons looking for investment with returns at a fixed time for planned expenditure like education, marriage etc | |
Children’s Education | These plans are specifically for the education (secondary and higher education) of the insured’s children. This is to ensure continuous education of the children. Importantly, these child plans come along with Waiver of Premium (WOP) option which allows waiver of premium on the demise of the primary policy holder. | |
Health Benefits | In addition to some common benefits, ULIP plans provide financial assistance to meet medical contingencies like Cancer and Heart Ailments. | |
Fund Option | Balanced Funds: Fixed Interest and Equity Instruments | Medium Risk |
Equity Funds: Stocks, Corporate shares, etc. | Medium-High Risk | |
Debt Funds: Corporate Bonds, Government Securities, etc. | Low Risk |
How to find the best ULIP plans?
There are a couple of key parameters to be reviewed by the insured before investing in an ideal ULIP plan :
The Claims settlement ration tells the insured what percentage of claims have been paid out by the insurance company. The higher the ratio, the better. The Solvency ratio mentions whether the insurance company will be able to honour its claims in the future. Once again, look for a high ratio for solvency. The IRDA requires insurers to have a solvency ratio of at least 1.5.
ULIPs are an investment as well as insurance products. One should review the performance of ULIP funds over long term. Remember that ULIPs can have equity, balanced and debt funds suitable for investors/policy holders with different risk appetite and investment time horizon. The performance of ULIP funds should compared with their respective benchmarks over long time periods (eg: Nifty 50, BSE100, NSE 500, BSE 200 etc).
Go for a ULIP with affordable charges. The typical charges associated with a ULIP include a premium allocation charge, policy administration charge, fund management fee, mortality charge, discontinued premium charge and switching charge.
Many ULIPs offer investment strategies such as Systematic Transfer Plans and lifecycle based investing. Look for ULIPs that offer the strategies most suited to your personal financial goals. It is critical to opt for a ULIP that is in sync with the investment horizon and the investment goals of the investor.
Investment goals are extremely important while planning one’s financial future. Based on the financial and investment goals and reasons for building a corpus, the investor should choose the ULIP plan. The goals could include Higher Education, Children’s Marriage, Financial Needs post Retirement, Investment in Land/House etc and based on when and how much funds are required, the insurance plan can be chosen.
The first step is to scan the market for choosing plans that are in line with the risk appetite and investment goals. Once all the plans have been chosen, they should be compared using the various features like 1) Financial stability of the insurer, 2) Charges levied under each Plan, 3) Claims Settlement Capabilities of the Insurer, 4) Flexibility of the Plan etc and then the optimum plan should be chosen.
Yet another factor that is to be taken into consideration while choosing a ULIP plan is flexibility that is offered by the plan that include the Investment Flexibility (what options are available to invest) and Tenure (Investment Period). One must also go into the details of the coverages/plans/features etc while making the final decision.
Types of ULIP Charges
Premium Allocation Charges | The charges are levied beforehand on the premium paid by the investor. These are the initial expenses incurred by a company in issuing the policy, like medical examination expenses and underwriting cost. |
Administration Charges | These charges are deducted periodically for the recovery of expenses borne by the insurer for maintaining a life insurance policy. |
Mortality Charges | These charges are borne by the insurer to provide a life cover to insured, which vary with the age and sum assured of the policy. These charges are deducted on a monthly basis. |
Surrender Charges | These charges are for deduction for full or partial encashment of premature units subject to the policy documents. These charges are levied as a percentage of the fund value or as a percentage of the premium. |
Fund Management Charges | The aggregated sum collected as premium is invested in equity and debt instruments. The insurer bears these charges for fund management, which vary with both fund and plan. The amount is subject to deduction calculating the net asset value or NAV. |
Fund Switching Charges | ULIP plans allow investors to invest their money in different fund options and also provide them with the option to switch between different funds for which their insurance company will charge the switching fee. Most of the policies provide few free switches every year. Currently switching charges are free upto certain number of transactions per year. |
Discontinuance Charges | On premature discontinuation of a plan within lock-in period, the insurer deducts a small fee. Since these charges are pre-set by IRDA, these are the same for almost all policies. |
Partial Withdrawal Charges | The policyholder can carry out lump sum withdrawals from the fund after the policy lapses and subject to the pre-determined conditions. Nevertheless, the partial withdrawals attract charges, as specified in the respective policy document. |