From the time of their launch, ULIPs have caught the fancy of individuals for several years. In fact, at one point, most individuals opting for life insurance would go in for ULIPs as opposed to term plans or endowment plans. However; their momentum has gone down recently due to regulatory changes. Yet, they are still ideal products to invest in as they not only provide life cover but also flexible investment options for various risk levels. There are a plethora of products available in ULIPs. Therefore, it is important for individuals to understand what to look for in a ULIP before investing.
ULIP is an abbreviation for Unit Linked Insurance Policy/Plan. What does unit linked mean? It means that it is linked to units of investment which are made in the capital and money markets. Hence, ULIPs are a combination of life insurance and market linked investment. Therefore, it provides you life cover as well as capital appreciation linked to the capital markets.
The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges under the plan. Thus, the portion of premium used to purchase units varies from product to product.
The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units.
Let us get familiarised with some common terms that you will come across while investing in ULIPS
Unit Fund: The entire invested amount from various investors in a scheme is pooled together after deducting the initial expenses to form a fund that is called a Unit Fund.
Unit: One single part of the total invested amount of the insurance fund is called a unit.
NAV: NAV or Net Asset Value is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers.