An individual can invest in different instruments to meet their insurance and investment requirements. One good option is a Unit-Linked Insurance Plan, simply called ULIP, that serves both purposes.
What is a ULIP?
ULIPs offer the flexibility to choose the allocation on the basis of your risk-handling comfort, meaning you can voluntarily invest in equity via ULIPs, if you’re willing to take the risk. On the other hand, if you’re a conservative investor, you can invest in the fixed income asset class through the same ULIP.
Unlike traditional investment programs, ULIPs offer the binary benefit of life insurance. This product utilises a certain portion of the premium paid to give life insurance cover and the remaining quantum is utilised towards the investment corpus.
ULIPs have a fixed lock-in period of five years. ULIPs offer pay-outs in case of situations such as the maturity of the policy or the early demise of the ensured.
Let us look at the two terms associated with ULIPs, which will help you understand about what ULIP plan benefits are more.
The insurer promises to pay a certain quantum to the family of the policyholder in case of his/her demise during the policy term. This quantum is known as the sum assured. The sum assured associated with a ULIP plan gives an assurance that a particular amount of money will be paid to the family of the insured in case of the policyholder’s demise during the policy term.
Fund value in ULIP
When you invest in a ULIP, your money is distributed via units in the fund, meaning that the total worth of the finances you enjoy in your portfolio is what the fund value is. Thus, what this means is that the returns that you earn from your ULIP – that’s the fund value upon maturity. To understand fund value, you need to first get to know what the Net Asset Value (NAV) is.
Net Asset Value
The Net Asset Value is the price of every unit in a fund. It depends on the performance of the different funds. The fund value is calculated using the NAV. As per the regulations of the IRDAI, insurance companies must declare the Net Asset Value (NAV) of each fund daily.
The NAV of a ULIP is calculated by the following formula –
Net Asset Value (NAV) = (Means – Arrears)/(Number of Outstanding units)
The fund value of a ULIP is the product of the NAV of each unit in the fund on any given day and the number of units that you hold. Say you hold 300 units in a particular fund. In addition, assume that the prevailing NAV on a given day is Rs. 60. Thus, in this case, the fund value of your ULIP is Rs. (300 x 60).
As the NAV fluctuates on a daily basis, the fund value held by you also changes.
Different cases of pay-outs
There are three conditions under which pay-outs can be received from a ULIP plan.
- Upon Policyholder’s demise
In case of the demise of the policyholder during the policy term, the sum assured or fund value, whichever is advanced, is paid to his family. So, if the fund underperforms and the fund value turns out to be lower than the sum assured, the sum assured will be paid.
• Upon policy surrender
In case the policy proprietor surrenders the policy during the lock-in period, the insurer deducts the applicable charges from the fund value and pays the rendition value after completion of the lock-in period. ULIPs have a lock-in period of 5 years.
Still, the insurer pays the fund value, if the policyholder surrenders the policy after completion of the lock-in period. The fund value is calculated by multiplying the NAV on the respective day by the number of units held.
• Upon maturity
When the policy period gets over, the fund value is paid to the policyholder.
Thus, that wraps up the discussion on the difference between the sum assured in a ULIP insurance plan and the fund value. Knowing what these crucial terms mean can help you buy a ULIP that covers your requirements adequately so that you can meet your life pretensions without any hassle. Before you invest in a ULIP plan, ensure that the sum assured is sufficient to get your family through any financial issue that may crop up in case of any unfortunate situation.