ULIPs Full Form | ULIP NAV | Key Features | Types

ULIPs full form is Unit-Linked Insurance Plan. It is an insurance product that can be utilized for different pay-outs including education, retirement, and more.

Unit Linked Insurance Plan (ULIP) is a mix of insurance along with investment. From a ULIP, the goal is to provide wealth creation along with life cover where the insurance company puts a portion of your investment towards life insurance and rest into a fund that is based on equity or debt or both and matches with your long-term goals. These goals could be retirement planning, children’s education or another important event you may wish to save for.

When you are investing in ULIPs, the insurance company invests part of the premium in shares/bonds, and the balance amount is utilized in providing an insurance cover. There are fund managers in the insurance companies who manage the investments.ULIPS allows you to switch your portfolio between debt and equity-based shares based on your risk appetite.

ULIP NAV

ULIP NAV is more understood on a per-unit basis. In the financial sense, it refers to the net value of the assets of the firm. In other words, ULIP NAV equals the assets minus liabilities. The assets taken to calculate the NAV of these plans include the market value of investments held by the insurance company’s fund, the value of the fund’s current assets and any accrued income. The liabilities taken to calculate the NAV include fund management charges, current liabilities, provisions and service tax.

The formula of ULIP NAV is as follows:

NAV = (Value of Current Assets + Market Value of Investments Held) – (Value of Current Liabilities & Provisions) / Total number of outstanding units on date

Like mutual funds, ULIP policyholders are also allotted units. Each unit has a net asset value (NAV) that is determined and declared every day. It is the value on which the net rate of returns on ULIPs is determined. The NAV varies from one ULIP to another as it is based on the performance of the fund.

Types of ULIPs

There are several types of ULIPs and they can be broadly categorized based on the needs and financial planning of the investor. Let us explore the types of unit-linked insurance plans:

Classification by Purpose

ULIPs are best classified based on the purpose they serve:

ULIP for Retirement- In this plan, the policyholders need to make the payment during their tenure with their employer, which is automatically collected as a whole. This is paid in the form of annuities to a policyholder after retirement.
ULIP for Wealth Collection- This plan primarily collects wealth over some time. Such plans are recommended for people who are in the late twenties and early thirties and by investing in this plan; they get the flexibility to fund their any future financial goal.
ULIP for Child Education- Several ULIPs provide money in small chunks in the key events of the policyholder’s children’s life. This ensures that no unforeseen event hinder their life in any manner. Moreover, ULIP child plans come packed with a Waiver of Premium (WoP). ( Wop means if you are disabled, the benefit allows you to stop making payments until you get back to work. The terms of the benefit can vary from policy to policy and between insurance companies. This valuable benefit adds very little to the cost of insurance.)
ULIP for Health Benefit- In addition to some common benefits, ULIPs efficiently provide financial assistance to meet medical contingencies.

Classification Based on Fund Option

Debt shares- These are the funds where the fund managers invest the premium in debt-oriented instruments that carry a lower risk but offer lower returns.
Equity Shares- These are the investment instruments where the fund managers invest the premium in the equity markets and hence are subject to higher risks.
Balanced shares- These are the options where the premium is balanced between the equity market and the debt market to minimize the risks for investors.

Classifications by Death Benefits

ULIPs are categorized into two broad categories depending on the death benefit:

Type 1 ULIPs- In case of death of the policyholder, the nominee receives the death benefit, which is equal to fund value by the insurance company. The mortality charge in type 1 unit-linked insurance plan keeps on reducing every year as the sum at risk reduces. The sum at risk is the difference between the accumulated fund value and sum assured under the policy. In other words, it is the amount an insurance company pays from its pocket in the event of the death of the policyholder.
Let’s understand this with the help of an example. Suppose, a person name XYZ took a ULIP plan with a sum assured of Rs. 50 lakh. He has paid the premium for 7 years and the fund value has now grown to Rs. 28 lakh. In the event of the death of the policyholder, the beneficiary will receive Rs. 50 lakh, the higher of sum assured (Rs. 50 lakh) or fund value (Rs. 28 lakh).
Type 2 ULIPs- When a person dies, the death benefit received by the nominee in case of type 2 ULIP is equal to the sum assured plus fund value. When a person dies, the death benefit received by the nominee in case of type 2 ULIP is equal to sum assured plus fund value.
Premiums for type 2 plans are higher than those for type 1 ULIP plans. A Type 2 ULIP plan also considers mortality rates with every policy year because the risk of death increases with age.
As above, let us look at an example to understand the concept better. Taking the above scenario where a person name ABC has taken a unit-linked plan with a sum assured of Rs. 50 lakh. And he has paid the premium for 7 years, which has resulted in fund value now standing at Rs. 28 lakh. In the event of the death of ABC, the beneficiary or nominee will receive Rs. 78 lakh, i.e. sum assured (Rs. 50 lakh) plus fund value (Rs. 28 lakh).

Key features of ULIPs

ULIP plans come packed with a variety of features to aid the investors:

Flexibility

Unit Linked Insurance Plan gives a lot of flexibility to the policyholder. You have the option to switch between different funds to match one’s changing needs. There is also a facility to partially withdraw from the fund but this is subject to special charges and conditions. You can even invest additional sums of money as top-up over regular premiums.

Funds for Crucial Milestones in Life

A significant amount of funds are required at different stages of life. They may be required for one’s business, building a house, a child’s marriage, etc. The facility to partially withdraw money gives access to much-needed funds at critical stages to address important needs.

Protecting the Child’s Future

The unit-linked plan gives the ability to invest in market-linked funds to earn better market-type returns. The funds can be used towards a child’s education, his or her marriage, etc. Parents can easily keep a check on the NAV to make sure the returns offered are in keeping with future requirements.

Financial Security Post Retirement

Equities tend to do well over the long term. Therefore, ULIPs are a good choice to add value to one’s retirement portfolio.

Benefits of ULIPs

A ULIP plan comes loaded with a host of benefits for its investors. Here’s alist of the different benefits of ULIPs:

Market-linked Returns

A part of the premium paid in a ULIP is invested in funds, which invest in different market instruments including debt and equity. The policyholder stands a chance to earn returns based on the market. Investors can use the data such as the NAV to keep a tab on returns and ensure they stay invested in the best ULIP plans.

Investment & Insurance Benefits

Unit Linked Insurance Plan offers the triple benefits of investment, life cover, and tax savings. Meaning that the investor gets to benefit from a comprehensive life cover based on his/her preferences and budget and reap market-linked returns on his/her investment.

Tax Benefits

Unit Linked Insurance Plan also offers tax exemption benefits for a maximum of Rs. 1.5 Lakh u/s 80C of the IT Act, 1961. Moreover, the maturity benefits of ULIPs are also tax-free.

Long Term Investment Benefits

A ULIP plan is one of the most sought-after investment instruments for the ones who are seeking to earn maximum returns on the investments they make in the long-term. It is vital to understand that market volatility and fluctuations may have an impact on the returns in the short-term. Instead, keeping the investment for a longer period makes it easy for the investors to deal with the market volatility and earn a high rate of return on the investment.

You can also check the comparison between ULIP vs Mutual Funds vs PPF

Why Invest in ULIPs

Here are some of the reasons for investing in ULIPs:

Higher Returns

ULIP plans come with higher returns. The investor can expect 12%-15% returns from his/her investment for the tenure of 10 years which is better than other investment options like NFS, PPF, etc. This is because ULIP offers various options to its investors like balanced funds, equity funds, or debt funds. Based on the risk appetite of the investor, s/he can choose one of the aforementioned options. ULIP allows switching between the funds, and by doing so an investor can obtain higher returns on the amount invested by them.

Help to Avoid Everyday Hassle of Managing Funds

A person does not have to worry about monitoring the stocks every day. The insurance company and its fund managers take care of that. They also bring to the table, expertise in fund management. Policyholders can also easily keep a tab on their portfolio with simple tools such as the unit-linked insurance plan NAV.

Transparency

One of the plus points of a ULIPs full form plan is that it is a transparent financial product. Unlike traditional plans where no information is shared with the policyholder, you are provided information about all the charges levied. Also, you know where the current account stands.

Liquidity

Unit Linked Insurance Plan is a fairly liquid investment product. They offer partial withdrawal of money to meet unpredictable events and emergencies. But this results in the reduction of the return as the amount would get reduced after you partially withdraw an amount from the plan. Also, the NAV of each fund is generally displayed on the website of the insurance company.

How to Choose the Best ULIP plan in India

There are some things that an investor should keep in mind while choosing the best ULIPs full form plans in India. Here’s a list of some pointers to consider while buying one:

Analysis of Personal Investment Goals

Before choosing a ULIPs full form plan; it is important for every investor to analyze their long-term financial goals. It is advised to opt for a ULIP that is in sync with the investment horizon and the investment goals. One should first decide the insurance objectives and then select a ULIP plan or its full form that fulfills them. One should be clear about the investment plans and insurance objectives when putting money in a ULIP to get the maximum benefit from the investment.

Decide Investment Goals

Investment goals are extremely important. You should spend sufficient time and think before deciding these goals. Investment goals may vary from having money for the higher education requirements of the children after some years to having sizeable funds for the child’s marriage. Once these goals have been decided, You can look for ULIPs with their benefits that fulfill the goals adequately.

Comparison of ULIPs Full form

Choosing the best ULIPs or its full form becomes easy when the investor is aware of its different benefits and features. The comparison can be done in the traditional offline way or online using one of the many online insurance comparison portals. The websites rank and compare plans of different insurance companies on parameters such as sum assured value, policy term, and different charges, etc.

Evaluate Risk Profile and Financial Stability

It is important to appraise one’s risk profile and financial stability before choosing a ULIP. Younger people who typically have higher risk appetite can opt plans, which are more equity focussed. Those people for whom financial stability is of prime importance should go for debt instruments, which would provide stability.

Conclusion

ULIPs and it’s full form could be more suited for individuals with a long-term financial plan of wealth creation and insurance. The goal could be retirement, children’s education or personal financial goals. A ULIP scheme gives its investors the dual benefit of savings and protection, all in a single plan.

Before signing up for these investment options, you should check our website WealthBucket. We have tons of features of investments including equity mutual funds, liquid mutual funds or debt mutual funds. Our advisors will guide you to choose the best option for you. You can either contact us at +91 9999379929 or email us at contact@wealthbucket.in

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