WHEN it comes to investment decisions, it is best to have a plan in place. A sound financial plan will chart out the investor’s particular objectives that they wish to fulfill over the years. Such a plan looks different for each individual because it depends on several personal factors. Presumably, the broader categories of this plan will involve insurance and investment for most people.
A ULIP plan is a long-term financial instrument that offers both the features to the policyholders. It is preferable for many policyholders as it reduces the hassle of keeping up with different policies. ULIP plan in India has become a popular choice over the years due to its several such advantages.
However, many are not aware of how a ULIP plan works specifically. Let’s look at a crucial feature of a ULIP plan that will help you understand it better.
What is Sum Assured in ULIP?
To begin with, you must have a fair idea of how a ULIP plan works. Like most types of insurance in India, the policyholder is required to pay a premium to keep the plan in force. However, with a ULIP plan, a portion of the premium goes into securing life coverage, and the remaining is invested in diverse funds. The policyholder can invest in funds of their choice depending on their income and risk appetite.
It must be noted that the ULIP sum assured does not function in the same way as it does with other insurance products. The basic definition of sum assured is the promised sum of money payable to the nominee. While the sum assured in ULIP does mean that, there are additional elements associated with it.
Since a ULIP plan also includes investments in different funds, the amount payable to the nominee can be the fund value too. The fund value is the total monetary worth of the policyholder’s units at a given time. Whether it is the fund value that is payable or the sum assured depends on which amount is higher at the time of claim filing.
How is Sum Assured in ULIPs Calculated?
Let’s take Aman’s example, who has purchased a ULIP plan with a sum assured of Rs. 10 lakhs. The annual premium payable for the ULIP plan of 20 years is Rs. 50,000. If we assume that half the premium that is Rs. 25,000 goes into securing life coverage and a half for investment purposes, then the following scenarios are applicable:
Case 1 – If an unfortunate incident resulted in Aman’s demise within the first five years of the ULIP plan, the nominee would be liable to receive only the sum assured. Simply put, they would receive financial compensation of Rs. 10 lakhs.
Case 2 – In case of Aman’s demise between the 5th and 10th year of the ULIP plan, the nominee would receive the sum assured or the fund value, whichever is higher. The fund value is calculated as the product of the Net Asset Value (NAV) of each unit on a particular day and the number of total units.
Case 3 – In case of Aman’s demise after ten years of the ULIP plan term, the nominee is liable to receive both the fund value and the sum assured.
Case 4 – If Aman were to survive the entire ULIP plan term, he is eligible to receive the full fund value. However, the sum assured is not payable to him.
A noteworthy fact is that the sum assured and the premium amount are directly related. The higher the paid premium amount, the greater will be the sum assured. The IRDAI has specific guidelines for the minimum sum assured, depending on the insured’s age at the time of purchasing a ULIP plan.
How To Choose Sum Assured When Investing in ULIP Plans?
While evaluating your decision to invest in a ULIP plan in India, there are few things you should ask yourself.
- Financial Objective
As the policyholder, you might have a keen interest in either the investment element or the insurance element of a ULIP plan. It is crucial to determine your investment objective as it will dictate the features and benefits you require out of it. Evaluate the duration of the ULIP plan most suitable to you, keeping in mind that the fund value needs stability to grow.
There are certain risks associated with market-linked products. The value of the funds depends on the performance of the market. You need to analyze the level of risks you can take comfortably. Plan the details of your investment in a ULIP plan accordingly.
Investment decisions involve a great deal of thinking, researching, and methodically evaluating. Though, the process can be incredibly rewarding as well. A ULIP plan can yield incredible benefits over the years if you invest wisely in them. Remember to choose a trusted insurance provider for your investments.
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