Basics and Concepts of ULIPs (Unit Linked Insurance Plan) by IndianMoney.

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What are ULIP's? A ULIP is a life Insurance plan which provides twin benefits of insurance and investment. ULIP's are closest to mutual funds in terms of their structure and functioning with the added feature of Insurance. ULIP's = Insurance + Investment In ULIPs, the investment risk is borne by the policy holder and hence returns are not guaranteed. The dynamics of the capital/stock market have a direct bearing on the performance of the ULIPs. ULIPs have a lock-in period of 5 years.

Why should one buy a ULIP? After the 2010 reforms charges on the ULIP have been capped at 3% and are much reduced ULIPs have a lower fund management charge than a mutual fund which have higher expense ratios Surrender charges on ULIPs have been reduced These policies have tax benefits No tax charged on partial withdrawals 1

Things to Know about ULIPs 1. How the Premium collected in a ULIP is invested You pay the premium and charges are deducted from it. The remaining amounts are used to purchase units of the fund and invested in equity, debt or cash in various proportions depending on the type of the policy. 2. Choice of Funds available: Insurance companies usually offer three choices of funds to invest: Equity Fund: The money is invested in the stock market. The objective of this kind of fund is growth through capital gains (i.e profit that results from selling a capital asset, such as stock) and dividends (distribution of profits). Equity Funds performance is linked to the performance of the stock market. Debt Fund: The money is invested mainly in risk free securities. These could be Government or corporate bonds , commercial paper of reputed Companies and certificates of deposit. This is done to provide a fixed income. The main objective of a debt fund is preservation of capital and generation of income on a steady basis. Balanced Fund: Such funds are characterized by portfolio that is made up of a mix of stocks (equity) and bonds (debt). The purpose of Hybrid Mutual Funds which may be debt hybrid or equity hybrid is to provide a balanced portfolio proving both growth and security to the investor's investments. 3. Whether one can switch the investment fund after taking a ULIP policy? Yes. 'SWITCH' option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number. 4. Tax benefits: ULIPs are eligible for tax benefits where the premium paid is tax deductible under Section 80 C of the Income tax act The maturity proceeds of the ULIP are tax free under Section 10 10(D)

5. What are the Charges, fees and deductions in a ULIP?

ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below.

Premium Allocation Charge : This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses. Mortality Charges : These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc. Fund Management Fees : These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV) . Policy/Administration Charges : These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate. Surrender Charges : A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions. Fund Switching Charge : Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. Service Tax Deductions : Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

Tips before buying a ULIP: 1. One has to verify the approved sales brochure for All the charges deductible under the policy Charges on premature surrender Features and benefits Limitations and exclusions Lapsation and its consequences Other disclosures

2. Free Look Period:

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period).

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