ULIP plan life cycle
ULIP is a two-in-one plan. It provides two things:-
1) Insurance coverage
2) Investment benefits
ULIP cycle:-
1. Proposer invest Rs.100,000 in ULIP plan
2. Insurance company (insurer) divides Rs.100,000 into two parts
a. Rs.5,000, b. Rs.95,000
3. Rs.5,000 is given to insurance-department of life insurance company. Insurance-department uses this sum to provide death benefits to proposer's family. This means that if the proposer dies, insurance-department provide his family a large sum of money. This sum of money is sufficient to take care of the children’s education, marriage and other living expenses.
4. Rs.95,000 is given to investment-department of life insurance company. Investment-department does business with this money and earn more money out of it. Whenever the proposer requires, the investment department gives the earned money back to him.
Following is a sample ULIP plan from a dummy life insurance company. The return on investment is shown @ 10%. All the charges taken by Life Insurance Company are given year by year. Benefits at expected 10% rate are also given year by year.
Although the return is 10%, but due to various charges, it reduces to 6- 7%. Funds those are invested in share market have chances of higher returns like 20-25%. & even has the changes of lower returns like 3-6%. Investors are aware about the fund in which their money is invested. Investors also has the option switching their fund from equity to secured funds and vice versa
Frequently Asked Questions
Q. Are ULIPs more expensive than Mutual Funds
A. Mutual funds + term insurance are good for short term investors who can actively track markets. Their costs and lock-in period is lesser compared to ULIPs.
But ULIPs are good option for long term investers. ULIPs are better developed compared to traditional insurance and good for investors who cannot actively track markets. For periods exceeding 10 years, ULIPs becomes more costeffective than mutual funds & term insurance combined
Hence both the ULIPs and mutual funds have their own unique features and should be carefully examined before buying them.
Q. Risks inherent in ULIP
A. ULIPs are subjected to the following risks:
• With the ups and downs of financial markets (like share markets boom or crash, interest rate up or down etc.), the value ULIPs may rise and fall.
• Past performance of any ULIP of any company may not indicate how it will perform in future.
• ULIPs have no guaranteed return.
