The world of insurance has seen the introduction of several new products and schemes in the last decade or so. These products have led to the emergence of a new type of policyholders, the ones who seek several wealth-related benefits along with a life cover. ULIPs have been at the forefront of this, bringing in investors and policyholders alike with an approach that merges both – insurance and investment. To have a successful and secure wealth creation journey with your ULIP plan, it is important to be well aware of the different aspects of the product. New investors or policyholders, especially, may not be completely aware of what the various terminologies and jargon within a ULIP mean. This article is here to help.
What is a ULIP policy?
Before we hop on to the terminologies associated with it, let us first understand how a ULIP works. When you pay premiums to your ULIP policy, the insurer uses the money for two purposes – to create the life cover amount you want and to invest in the financial instrument of your choice. A ULIP works in a similar vein to a mutual fund when it comes to investment – funds from various investors are pooled together to create a lump sum amount, which is then invested into equity and debt instruments. The investor is allotted units as per their share in the total investment amount.
While the life cover is building up, your invested amount gains return as per the market performance and helps you gain wealth in the long run.
ULIP terms you should know of
- NAV (Net Asset Value)
As mentioned earlier, you get allotted units according to your share of the pooled amount. The value of each unit in this scenario is referred to as the Net Asset Value or the NAV. The NAV changes as per the performance of the investment fund in the market. A higher NAV means more returns for you.
Note that the NAV is arrived at only after subtracting the liabilities related to the investment.
- Fund switching
The policyholder of a ULIP plan not only gets the option to choose where they wish to invest their money – in equity or debt instruments – but they also have the option to switch funds as per their wish. A policyholder with all their investment in debt funds can make the decision to switch a major chunk of their money into equity funds and vice versa. This is called as fund switching.
- Mortality charges
The mortality charge refers to the portion of your premium that is used to build the life cover. While mortality charges constitute the majority of the chunk of the premium of a regular plan, they are only a small portion of the premium of a ULIP plan, as there are several other uses of a ULIP premium as well.
- Fund management charges
These are the charges that the insurance provider levies for handling the investments in the market. A ULIP offers the benefit of getting to invest in the stock market without having to deal with the intricacies of the stock market directly. The cost of the insurer dealing with the same is taken into account via the fund management charges.
- ULIP lock-in period
ULIPs have a lock-in period of five years. You can make withdrawals on your ULIP funds only after you have completed this lock-in period. This is a good way to ensure that your money stays in the market for the long-term and brings in good returns.
- Partial withdrawals
Once the ULIP lock-in period of five years is over, you can withdraw your funds from the ULIP policy as per your requirement. These withdrawals are referred to as partial withdrawals. Some insurers even offer the option to systemise your partial withdrawals with a systematic plan.
- Maturity benefit
The amount that you (or the nominee/s, in your absence) receive on the completion of the term of the ULIP plan is referred to as the maturity benefit. The lesser you have withdrawn from your ULIP funds, the more will be the maturity benefit. This amount is tax-exempted, provided that the terms and conditions are met. The exemption aspect may change as per amendments in tax laws.
Now that you know what a ULIP policy is and the important terms related to it, we hope you have a safe and secure ULIP journey. Do remember to read the terms and conditions of the policy documents before signing.