You might be familiar with ULIP, or Unit Linked Insurance Plan, as a well-known investment choice that combines insurance with returns linked to the market. But are you aware of how to interpret the benefits illustration that accompanies each ULIP plan? The benefits illustration is a document that outlines the anticipated returns on the invested part of your premium based on specific assumptions and scenarios.
Let’s discuss them in detail.
What is a benefit illustration?
A benefits illustration is a table showing the projected returns on the invested portion of your premium after deducting the charges for the entire policy term. The benefits illustration is based on two assumed rates of return, 4% and 8%. These are not guaranteed returns but only indicative of what you can expect in different market conditions. The actual returns may differ depending on the performance of the fund you choose and the market fluctuations.
The benefits illustration also shows you the guaranteed and non-guaranteed benefits you will receive at maturity or death. The guaranteed benefits are the minimum amount you will receive, regardless of the market performance. The non-guaranteed benefits are the additional amount you may receive, depending on the actual returns.
How to read a benefit illustration?
A benefit illustration typically contains the following terms and sections:
- Policy year: This is the number of years the policy is in force. For example, if you buy a ULIP plan for 10 years, the policy year will start at 1 and end at 10.
- Annualised premium: This is the premium you pay every year for the plan. For example, if you pay Rs. 50,000 every year for the plan, and the annualised premium will be Rs. 50,000.
- Premium allocation charge: This is the charge that is deducted from your premium before it is invested in the fund of your choice. This charge covers the insurer’s expenses, such as commission, administration, etc. For example, if the premium allocation charge is 5%, then Rs. 2,500 will be deducted from your Rs. 50,000 premium and the remaining Rs. 47,500 will be invested in the fund.
- Fund value: This is the value of your investment in the fund at the end of each policy year. This value depends on the performance of the fund and the market conditions. For example, if the fund value at the end of the first policy year is Rs. 52,000, it means that your Rs. 47,500 investment has grown by Rs. 4,500.
- Surrender value: This is the sum you will get if you end the policy before it reaches its maturity date. This value may be lower than the fund value, as there may be some charges or penalties for early exit. For example, if the surrender value at the end of the first policy year is Rs. 48,000, it means that you will lose Rs. 4,000 as surrender charges if you surrender the policy at that time.
- Death benefit: This is the amount your nominee will receive in case of your untimely demise during the policy term. This amount may be higher than the fund value, as the plan may have additional benefits or guarantees. For example, if the death benefit at the end of the first policy year is Rs. 60,000, it means that your nominee will get Rs. 60,000 if you pass away at that time.
Benefits Illustration Tips
Now that you know how to read a benefits illustration and are aware of what is ULIP, here are some tips on how to use it to compare different ULIP plans and choose the best one for your needs:
- Compare the charges: Different ULIP plans may have different fees, such as premium allocation charges, policy administration charges, fund management charges, mortality charges, etc. These charges reduce the amount of your premium invested in the fund, affecting your returns.
- Compare the fund options: Different ULIP plans may offer different fund options. These fund options have varied risk-return profiles, affecting your returns. You should check the past performance and portfolio composition of the fund options and the flexibility to switch between them.
- Compare the flexibility: ULIP plans may offer different flexibility features, such as premium payment frequency, premium payment term, partial withdrawal, top-up, etc. These flexibility features allow you to adjust your ULIP plan according to your changing needs and financial situation.
Understanding your ULIP plan’s benefits illustration is crucial. It clearly shows projected returns, guaranteed and non-guaranteed benefits and charges. By examining policy terms, premiums, charges, fund values, surrender values and death benefits, you gain insights. Use these insights to compare ULIP plans wisely, considering charges, fund options and flexibility features to choose the best-suited plan for your needs.