How ULIPs work?
ULIPs work on the lines of mutual funds. The premium paid by the client (less any charge) is used to buy units in various funds (aggressive, balanced or conservative) floated by the insurance companies. Units are bought according to the plan chosen by the policyholder. On every additional premium, more units are allotted to his fund. The policyholder can also switch among the funds as and when he desires. While some companies allow any number of free switches to the policyholder, some restrict the number to just three or four. If the number is exceeded, a certain charge is levied.
Individuals can also make additional investments (besides premium) from time to time to increase the savings component in their plan. This facility is termed “top-up”. The money parked in a ULIP plan is returned either on the insured’s death or in the event of maturity of the policy. In case of the insured person’s untimely death, the amount that the beneficiary is paid is the higher of the sum assured (insurance cover) or the value of the units (investments). However, some schemes pay the sum assured plus the prevailing value of the investments.
Though there are various benefits attached to buying a unit linked insurance product, the return on the ULIPs is directly linked to the performance of the stocks or bonds it invests in. An individual must remain prepared for bullish as well as bearish market conditions. Gaurav Mashruwala, a certified financial planner, says, “Usually people consider a scenario of the market going up while buying Unit Linked Insurance Plans. However, it is important to look at the other side of the coin too. If the market goes down, the fund value will also decline. Individuals easily give in to the illustrative returns presented by the sales person, projecting a 6 or a 10 per cent growth in the years ahead. What if the market crashes? This aspect has also to be kept in mind while parking money in Unit plans”.