When people see how investments in the capital market have grown over the last few years, they prefer to use their funds in ways that help them to participate in the boom in the capital market.
Insurers have developed plans that combine the benefits of life insurance as well as giving various options of participating in the growth of the capital market. Such plans of insurance are called Linked Life Insurance Plans, also Unit Linked Insurance Plans i.e. ULIPs. This means an ULIP is a life insurance protection and investment.
Insurers offer policyholders a choice of funds in which their moneys may be invested, like –
- Equity Funds: Sometimes also called Growth Funds, in which, there would more investments in equities which are shares/stocks traded in the stock market.
- Debt Funds: Also called Bond Funds, in which, the investments are primarily in Government and Government guaranteed securities and such safe debts and other high investment grade corporate bonds.
- Money Market Funds: Also called Liquid Funds, in which, the investment may be more in short term money market instruments such as treasury bills, commercial papers etc.
- Balanced Funds: In this type of funds, the investments are in both equity as well as debts.
ULIPs provide a lot of flexibility to the policyholders –
- The option of switching, in which, a policyholder can switch his moneys from one fund to another during the term of the policy.
- Policyholders are allowed to make a lump sum additional contribution at any time. The risk cover will remain same, but the amount going into the fund for investment will change i.e. known as Top-up.
- Policyholders may be allowed to redirect the current premium into any fund, in any proportion, irrespective of the fund in which the earlier premiums have been invested, to take advantage of the market conditions, without exercising the switching option.
- If policyholders may not pay the premium in a year, subject to certain conditions, no new units will be added to his fund but some units will be reduced to pay for the annual charges for cover, administration, fund management etc. This is called premium holiday. The arrangement can also be terminated at any time & the amount in the fund withdrawn. The loss will only be a nominal fee.
ULIPs differ from other traditional insurance plans in matters of documents, lapse, revival conditions and in claim settlement procedures. The proposal form will have questions about family history & personal history. The agent’s report is also called for. The underwriter may call for more reports, medical or otherwise to check insurability, if necessary.