Unlike other traditional policies, ULIP plans offer the dual benefit of life insurance as well as investment. This financial tool is a combination of life insurance cover and an investment opportunity. But first let us see what ULIPs are.
ULIP or unit-linked insurance plan is a financial product that comprises two parts. First, the investment portion, and second, the insurance portion. It combines the features of savings along with the protection of insurance in a single plan.
ULIPs have two critical aspects:
What do you mean by sum assured in ULIPs?
Now that you know ULIP meaning, here’s a deep dive into it.
The insurance company allocates the premium paid towards the ULIP policy to provide you with an insurance cover. The balance portion is distributed towards the investment part of the ULIP. Premiums depend on many factors like the age of the policyholder, the sum insured, and a few more elements.
The insurance aspect of the ULIP provides you with a guaranteed amount at the passing of the insured during the policy term, and that amount is called the sum assured.
This sum assured is the fixed amount determined at the start of the ULIP that will become payable to the insured in case of his passing during his policy term—ensuring that the insured’s family receives the assured sum.
What do you mean by fund value?
Another part of the premium paid in ULIPs goes towards the investment fund. The insured has to choose a ULIP, which has an investment fund that matches his risk-taking ability. The investment fund uses such contributions from its unitholder to buy assets with future growth potential. The total assets held, reduced by the liabilities of the investment fund, is the value of the fund.
The investment fund towards which contribution is made has a NAV that is calculated per unitholder. Each unitholder has a share in such fund assets, and that share is known as NAV. It is nothing but the share of each unit holder in the assets of the fund.
When a person multiples the unit total allotted to him by the NAV of the fund, he gets the fund value of the investment portion of his ULIP policy.
Difference between sum assured and fund value in ULIPs
As we are now aware of what both terms mean, we can understand that the major difference between sum assured and fund value is on the payout of the ULIP policy. The sum assured and fund value component of the ULIP is paid to investors on fulfilling certain conditions.
Payout of the ULIP policy happens under three scenarios:
- In case of passing of the policyholder
In such a case, the policyholder is entitled to receive the sum assured of the insurance portion or the fund value of the investment portion of ULIP, whichever is higher. This amount is remitted to the family members of the policyholders.
When the investment has underperformed, and its actual NAV is lower than the sum assured, the policyholder is guaranteed that his family receives the sum assured.
- Upon surrender of policy
The ULIP policy has a lock-in period of five years. In a case where the policyholder surrenders the policy during the lock-in period, he will get the fund value reduced by certain charges at the end of the lock-in period.
If the policyholder surrenders the policy after the lock-in period but before the policy term, he is entitled to receive the fund value as calculated on the surrender date.
- Upon policy maturity
The insured gets the fund value on the date of maturity of the investment fund as a payout.
Above all, to simplify ULIP meaning, it offers a life insurance cover that protects the financial future of your loved ones in your absence. At the same time, your corpus is invested in market-linked securities giving you the potential to grow your wealth on surviving the policy term.
Based on the above distinction, it is crucial to ensure you select the right ULIP policy. Here is an overview of what to look for in a ULIP:
ULIPs should have low charges, offers investment flexibility, and top-up options and loyalty benefits. It should offer multiple investment strategies such as lifecycle-based investing or an automatic transfer strategy that helps align your investments with your financial goals.