A unit-linked insurance plan is an investment vehicle where the investor buys units of a particular company instead of buying shares of the same company. These companies offer various products such as life insurance, health insurance, mutual funds, annuity policies, etc.
To invest in these products, investors buy units of those companies. These units are called ‘units’ because they represent ownership interests in the respective company. Investors get returns on their invested money depending upon the company’s performance.
So, if the company does well, the investor gets good returns on his investment. On the contrary, if the company performs poorly, then the investor loses his entire investment amount.
Table of Contents
- Understanding different types of ULIP plans
- 1. ULIP Type 1 Plan
- 2. ULIP Type 2 Plans
- What makes these two types of ULIPs different?
- To Sum Up
Delving deeper into the types of ULIP plans
A unit-linked insurance plan is a type of life insurance plan that combines investment opportunities with insurance benefits. It is usually purchased by investors who want both protection against risks and potential returns.
If an insured person dies during his/her policy term, then the insurance company has two options. It may pay the original amount (or the final value) of the ULIP to the beneficiary. Or, if the ULIP is not fully funded at the time of the insured’s demise, then the insurance company must pay the total amount of the ULIP to its own general account.
Let’s say, for instance, that you have bought an insurance policy with a total cash payout of Rs. 5 lakh. At the same time, your investment has grown to Rs. 10 lakh. Thus, if the insurer pays out the total amount of Rs. 5 lakh, the beneficiary would receive only half of what he/she was promised.
On the other hand, if the insurer were to pay out Rs. 15 lakh, then the beneficiary could expect to get back almost twice the original amount invested.
Beneficiaries of a ULIP Type II plan get full insurance coverage for the policyholder’s life. Consequently, the death benefit paid is equal to the total premium paid.
Let us say that your sum insured is Rs 50 lakhs, and your beneficiaries will get this amount directly from the insurance company. This is how type 2 policies operate.
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There are several different kinds of ULIPs, depending on their features and characteristics. Some ULIPs offer life insurance benefits, others provide disability insurance benefits, and still, others offer both. And some ULIPs focus on providing retirement income, while others focus on providing an annuity for children.
- As mentioned above, there are various methods by which the death benefit is calculated. The higher of the total insurance cover provided (i.e., the premium paid) or the investment made is taken into account for calculating the death benefit in type one ULIP plans. However, the death benefit payable under the plan is solely determined by the investment made under the scheme in type two ULIP plans.
- Secondly, the “risk” of an insurance company paying out depends on whether they’re using a type 1 or type 2 ULIP. If they use a type 1 ULIP, then their annual payout decreases because their funds’ values increase. However, if they use a type 2 ULIP, then their risk increases because the payments they receive from the policyholder may be less than the total premium paid by the policyholder.
- With regard to type 2 ULIPs, an insurance company pays out the full death benefits if the insured person dies during the policy term. However, because the insurer has paid out the entire death benefits up until the end of the policy term, the total sum guaranteed by the insurance company remains unchanged regardless of how high the fund’s market price rises.
With its dual benefit of both investment and life cover, ULIPs are among the most popular types of mutual funds available today. Whether you opt for a Type 1 or Type II ULIP, you can customize your policy to suit your future financial goals.
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