Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time

varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both. ULIPs provide insurance cover with investment potential but they seem to charge more for bundling benefits. What are ULIPs? A unit linked insurance policy is one in which the customer is provided with a life insurance cover and the premium paid is invested in either debt or equity products or a combination of the two. In other words, it enables the buyer to secure some protection for his family in the event of his untimely death and at the same time provides him an opportunity to earn a return on his premium paid. In the event of the insured person's untimely death, his nominees would normally receive an amount that is the higher of the sum assured (insurance cover) or the value of the units (investments). However, there are some schemes in which the policyholder receives the sum assured plus the value of the investments. Every insurance company has four to five ULIPs with varying investment options, charges and conditions for withdrawals and surrender. Moreover, schemes have been tailored to suit different customer profiles and, in that sense, offer a great deal of choice. The advantage of ULIP is that since the investments are made for long periods, the chances of earning a decent return are high. However, the charges paid in these schemes in terms of the entry load, administrative fees, buying and selling charges and asset management charges are fairly high and vary from insurer to insurer in the quantum as also in the manner in which they are charged. Tax benefits The premiums paid for ULIPs are eligible for tax rebates Proceeds from ULIPs are tax-free under section 10(10D) unlike those from a mutual fund which attract capital gains tax. Key features Premiums paid can be single, regular or variable. The payment period too can be regular or variable. The risk cover (insurance cover) can be increased or decreased.

As in all insurance policies, the risk charge (mortality rate) varies with age. However, for an individual the risk charge is always based on the age of the policyholder in the year of commencement of the policy. These charges are normally deducted on a monthly basis from the unit value. For instance, if there is an increase in the value of units due to market conditions, the sum at risk (sum assured less the value of investments) reduces and so the risk charges are lower. The maturity benefit is not typically a fixed amount and the maturity period can be advanced (early withdrawal) or extended. Investments can be made in gilt funds (government securities), balanced funds (part debt, part equity), growth funds (equities) or bonds (corporate bonds). The policyholder can switch between schemes (for instance, balanced to debt or gilt to equity). The investment risk is transferred to the policyholder. The maturity benefit is the net asset value of the units. The value would be high or low depending on the market conditions during the period of the policy and the performance of the fund manager. Thus there is no capital protection on maturity unless the scheme specially provides for it. There could be policies that allow the policyholder to remain invested beyond the maturity period in the event of the maturity value not being satisfactory. What you MUST ask your agent First-year charges: Usually, a minimum of 15 per cent. However, high premiums attract lower charges and vice versa. Charges can be as high as 50 per cent if the scheme affords a lot of flexibility. Subsequent charges: Usually lower than first-year charges. However, some insurers charge higher fees in the initial years and lower them significantly in the subsequent years. Expenses Charged in a ULIP Premium Allocation Charge: A percentage of the premium is appropriated towards charges initial and renewal expenses apart from commission expenses before allocating the units under the policy. Mortality Charges: These are charges for the cost of insurance coverage and depend on number of factors such as age, amount of coverage, state of health etc. Fund Management Fees: Fees levied for management of the fund and is deducted before arriving at the NAV. Fund management charges vary from 0.6 per cent to 0.75 per cent for a money market fund, and around 1.5 per cent for an equity-oriented scheme. Fund management expenses and the brokerage are built into the daily net asset value.

Administration Charges: This is the charge for administration of the plan and is levied by cancellation of units. This ranges between Rs 15 per month to Rs 60 per month Surrender Charges: Insurers levy certain charges if the policy is surrendered prematurely. Fund Switching Charge: Some insurers allow four free switches in every year but link it to a minimum amount. Others allow just one free switch in each year and charge Rs 100 for every subsequent switch. Some insurers don't charge anything. Service Tax Deductions: Service tax is deducted from the risk portion of the premium. Fund performance: You could check out the performance of similar schemes (balanced with balanced; equity with equity) across insurance companies. How does ULIP work? Rahul is a thirty-year old who wants a product that will give him market-linked returns as well as a life cover. He wants to invest Rs 50,000 a year for 10 years in an equity-based scheme. Based on this premium, the sum assured works out to Rs 532,000, the exact amount of premium being Rs 50,032. Based on the current NAV of the plan that Rahul chooses to invest in, he is allotted units in the scheme. Then, units equivalent to the charges are deducted from his portfolio. The charges in the first year include a 14 per cent sales charge, an administration charge (7 per cent for the first Rs 20,000 and 3 per cent for the remaining Rs 30,000) and underwriting charges, which are deducted monthly. Besides, mortality charges or the charges for the life cover are also deducted. For the remaining nine years a 3.5 per cent sales charge and an administrative charge of 4 per cent (for the first Rs 20,000 and 2 per cent for the remaining Rs 30,000) are levied in addition to mortality charges. Fund management fee of 1.5 per cent (equity) and brokerage are also charged. This cost is built into the calculation of net asset value. On maturity - that is, after 10 years - Rahul would receive the sum assured of Rs 532,000 or the market value of the units whichever is higher. Assuming the growth rate in the market value of the units to be 6 per cent per annum Rahul would receive Rs 581,500; assuming the growth rate in the market value of the units to be 10 per cent, Rahul would receive Rs 724,400. In case of Rahul's untimely death at the end of the ninth year, his beneficiaries would receive the sum assured of Rs 532,000 or the market value of the units whichever is higher. Assuming the growth rate in the market value of units is 6 per cent per annum, the value of investment would be Rs 510,200. However, his family will get Rs 532,000 as it is the sum assured.

The sum assured is treated as sacred under the new guidelines; it cannot be reduced at any point during the term of the policy except under certain conditions like a partial withdrawal within two years of death or all partial withdrawals after 60 years of age. This way the client is at ease with regards to the sum assured at his disposal. 3. Premium payments If less than first 3 years premiums are paid, the life cover will lapse and policy will be terminated by paying the surrender value. However, if at least first 3 years premiums have been paid, then the life cover would have to continue at the option of the client. 4. Surrender value The surrender value would be payable only after completion of 3 policy years. 5.Partial withdrawals The client can make partial withdrawals only after 3 policy years. 6. Settlement The client has the option to claim the amount accumulated in his account after maturity of the term of the policy upto a maximum of 5 years. For instance, if the ULIP matures on January 1, 2007, the client has the option to claim the ULIP monies till as late as December 31, 2012. However, life cover will not be available during the extended period. 7. Charges The insurance company must state the ULIP charges explicitly. They must also give the method of deduction of charges.

Key Benefits:

Pay premium for five years, while your policy continues for ten years. Higher allocation of your premium up to 88% for investment. Special additions of units added every year from 6th Year for incremental wealth creation. Choose from four different investment funds to meet your financial objectives. Five times the life cover of your annual premium. Tax benefit under 80C and 10(10D).
The advantage of unit-linked plans is that they are simple, clear, and easy to understand. Being transparent the policyholder gets the entire upside on the performance of his fund. Besides all the advantages they offer to the customers, unit-linked plans also lead to an efficient utilisation of capital.