Q1 – What is ULIP ?
Conventional Endowment Plans are Bonus Linked Plans whereas Unit Linked Insurance Plans are market linked plans. To understand this more clearly ULIP Plans are combination of Mutual Fund plus Insurance. Under conventional policy the maturity benefit and the death benefit are guaranteed by the Insurance Company whereas under Unit Linked policies the benefits are generally not guaranteed because the policy holder gets the value of the units on that particular date, which may vary according to market position.
Q2 – What other differences are there ?
- Under Unit Linked Policy the policy holder has to exercise his choice regarding investment of his funds out of several different funds having different degrees of risk and reward.
- Premiums under Unit Plans are regular premium with flexibility of increase/decrease.
- Lump-Sum Top Up is also allowed in ULIP whereas there is no such facility in conventional plans.
- Sum Assured under ULIP is a multiple of regular premium with the option to the insured to increase or decrease the level of Sum Assured subsequently.
- Policy holder is allowed units for premiums deposited based on prevailing NAV of the particular fund on the date of deposit.
- The Policy holder has to bear initial expenses charge; administration charge; fund-management charge and life risk cover charge and all these charges are deducted every year from the fund of policy holder, by reducing the total units, whereas in conventional plans all these expenses are put as the expenses.
Q3 – What are the disadvantages ?
- The value of the fund goes up and down based upon market conditions.
- The investment risk is borne by the policy holder whereby he may lose his money and may not achieve his financial goals.
- The risk charge is not level and vary depending upon attained age.
- Under traditional policy the policy holder get sum assured and bonuses upon maturity and there are no chances of loss of any kind whereas under unit linked policy he gets the market value of units in his account which may go down also.