The introduction of the ULIP policy in the market has been a monumental event for the investment and insurance sector. After all, ULIPs are one-of-a-kind products that provide life insurance and investment under one plan. This relieves the policyholder of managing two different products. Life insurance is important for every individual, especially if one has dependents and is the primary earning member of their family. In the unfortunate event of the policyholder’s death, the family members receive financial compensation that helps them in monetary matters. In regard to financial compensation, or the sum assured, there are two ways in which ULIP functions. Let’s see what these two types of ULIP plans are and how they impact your overall ULIP policy experience.
Understanding ULIPs and their types
In the event of the passing away of the ULIP policyholder, the insurer provides the family with either of the two amounts: the sum assured amount (also called the life cover) or the fund value of the ULIP.
To understand the exact difference between the two, let us understand how ULIPs work. ULIPs require the policyholder to pay a premium. This premium is divided into two purposes. One part of the premium goes into creating and sustaining the life cover amount and the other part of the premium goes into investing in market-linked or risk-free instruments. As the policy ages, the fund value grows from accumulating returns on the invested amount. The longer the money is in the market, the higher will be the returns on the ULIP policy.
- Type I ULIPs
In a life insurance policy, there is a ‘sum at risk’ amount, which refers to the money that the insurer pays from their own pockets in the event of the policyholder’s death. The sum at risk amount changes as the fund value grows in Type I ULIPs. It decreases as the fund value increases with the accumulated returns. In these types of ULIPs, the insurer pays the amount that holds the higher value at the time of the policyholder’s death: the sum at risk figure or the fund value. This means that when the fund value overrides the sum at risk amount, the insurer is not liable to pay anything from their own pockets.
Let’s take an example to understand this better.
The ULIP policy you have taken has a sum assured amount of Rs 80 lakhs. The fund value of this plan after 7 years is Rs 35 lakhs. This means the sum at risk amount is Rs 45 lakhs. If the policyholder were to pass away at this stage, the beneficiaries would receive Rs 45 lakhs, the higher of the two.
Now, after a duration of 12 years, the fund value increases to Rs 90 lakhs. The sum at risk at this point is nil for the insurer, since the fund value has overridden it. If the policyholder were to pass away at this point, the insurer will pay the beneficiaries the total fund value, which is Rs 90 lakhs. The insurer is exempted from paying anything from their own pockets. If you are looking for more resources and tools to better help you plan your ULIP investment, you can take the help of a ULIP plan calculator.
- Type II ULIPs
In Type II ULIPs, the sum at risk stays the same throughout the duration of the policy. Any increase in the fund value does not have an effect on the sum at risk amount. The major benefit of this type of ULIP policy is that, in the event of the policyholder’s death, the beneficiaries receive the total of the sum at risk amount and the fund value.
Let’s take the previous example of the Rs 80 lakhs sum assured amount. After 7 years, if the policyholder were to pass away, the amount that the beneficiaries would receive is Rs 1. 15 crores, which is a total of Rs 80 lakhs (sum assured amount) and Rs 35 lakhs (fund value at the time).
Which ULIP policy is better?
The answer to this question is subjective. It depends on what you are seeking in a plan. If you are seeking a ULIP plan on a low budget, then Type I ULIPs are a better option as they have a low mortality charge. The mortality charge also decreases as the fund value grows.
On the other hand, if you seek a higher sum assured amount, then Type II ULIPs are a better option. With the help of some expert advice and tools, such as the ULIP plan calculator, you will be able to reach a prudent decision.