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How Do ULIPs Work?

Updated On Nov 09, 2021

The primary goal of an insurance policy is to protect your loved ones financially in the case of a disaster. You can choose from a range of programs based on your life stage and needs, such as pure protection, savings, kid education, retirement (wealth generation), and so on. The Unit Linked Insurance Plan is one product that may be used as both an insurance and an investment tool (ULIP). 

The insurer collects money from all policyholders and invests it in funds that they select. The overall corpus is divided into 'units' with a certain face value once the money has been invested. The sum invested is then divided into 'Units' for each investor. The Net Asset Value (NAV) is the value of each unit at any given time (NAV). The effect of changes in the value of the underlying assets is represented in the NAV.

How Do ULIPs Work?

Below are a few points on how ULIPs work:

  • Investment Allocation

Some ULIPs, offer opportunities to systematically shift assets from one fund type to another, allowing you to manage your present corpus as well as future investments (based on your varying risk appetite). They also enable you to actively manage your assets in order to maximize the return on your investment.

  • Switch

You can switch your existing investment from one fund type to another using ULIPs. This function allows you to shift all of your funds according to your market view and life stage.

Start your investing and insurance adventure by determining how much insurance coverage you require. During the first five years of the contract, the connected insurance products provide no liquidity.

  • Partial Withdrawals

The ability to make partial withdrawals is a feature of ULIPs that is not available in other insurance policies. In ULIPs, the policyholder can take out a portion of the Fund Value for any reason without jeopardizing the plan's continuation. After the first five years of the plan, this withdrawal can be performed at any time, and a limited number of withdrawals are also free of charge.

  • Top-ups

Top-up premiums are another feature of ULIPs that allows you to make additional contributions to the plan. As a result, in addition to the premiums paid, the policyholder can invest any surplus funds in the plan and reap the benefits of high returns.

  • Equity Funds

These funds primarily invest in the stock market and so have a more aggressive investment approach. These funds carry a high level of risk, as well as a great potential for profit.

  • Debt Funds

Debt funds, on the other hand, employ a conservative investment strategy. These funds are low-risk since they invest in the debt and bond markets. These funds' returns are conservative and low, as you might expect.

  • Balanced Funds

Balanced funds are a good option for investors who want larger returns than debt funds but aren't interested in the high-risk strategy of equity funds. These funds are a mix of equity and debt funds that invest in a conservative manner. The risk is low, and the returns are good, higher than debt funds but lower than equities funds.

  • Charges

The premiums you pay will be subject to a number of charges before being invested in the fund of your choice. Premium allocation charges, administration charges, fund management charges, mortality charges, and other charges are deducted annually or monthly, depending on the type of charge and the terms of the policy.

Conclusion

ULIPs are private insurance that blends the benefits of equity funds and income protection into a specific plan or product. The premiums you pay for your plan are adjusted to reflect the previously mentioned expenses. The net premium is then invested in a mutual fund of your choice (equity, debt, balanced, and so on).

Also read: 

Understanding The Basics Of ULIP Investments

5 ULIP Myths Debunked

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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