How to read a benefit illustration of a ULIP policy?
Unit Linked Insurance Plans or ULIPs are gaining popularity among investors of all ages because of their multiple benefits. These plans offer the dual benefit of life insurance and wealth creation through investment in financial instruments. Some other benefits that investors reap when they buy ULIPs online or offline are the tax benefits on premium and maturity amount and the flexibility to switch their asset allocation from time to time. Investors can also withdraw a part of their money if needed after the completion of the lock-in period. But all these benefits come at a cost in the form of various charges associated with a ULIP policy.
Every customer has a right to know what is a ULIP Policy, how does a ULIP scheme work, how will the premium payment be used, where will it be invested, what changes will they have to pay and how much returns to expect. The Insurance Regulatory and Development Authority of India or IRDAI has made it compulsory for all insurance companies to provide a ‘Benefit Illustration,’ to the prospective customers of their ULIP plans. The aim is to provide transparency and resolve all the doubts and queries of customers regarding the working of a ULIP.
Things to Remember
- Investors should always seek a company-generated benefit illustration and not the one that has been prepared by an agent or a dealer.
- When planning to buy ULIP online, investors should look for all the terms and conditions associated with the policy on the main screen of the benefit illustration. The illustration should be displayed before the customer is directed to the application page to fill the form and pay the first premium.
- Customers should save or print the final benefit illustration with all the details related to premiums, policy duration, and charges. The insurance company will also email the same to the customer after the submission of the form and before the payment of the premium.
Understanding the Benefit Illustration
The Benefit Illustration outlined by an insurance company helps people understand the expenses, returns, and maturity value of their ULIP in various investment scenarios. This information enables them to make informed decisions about the total amount of the policy, the premium frequency, the asset allocation, and the duration for achieving their goals.
As per the IRDAI norms, the illustration assumes the gross investment return to be 4% and 8%. However, the actual returns can vary based on the chosen asset class.
Some important things to note while reading the Benefit Illustration:
- Policy and Personal Details-The Illustration mentions the name, age, and other details like the chosen premium amount, and term of the policy, along with the fund allocation selected by the investor. The illustration for online products has four columns, while that for offline products has five columns. The fifth column mentions the commission payable to the agent.
- Premium Details and Premium Allocation Charge-The illustration outlines the premium amount, the premium allocation charge that is deducted from the premium amount, and the amount available for investment in various types of ULIP options. Most insurance companies offer options to invest in only equity funds or debt funds or balanced or growth funds.
- Details of All Charges-Also mentioned in the illustration are all the other charges like the fund management charge, the policy administration charge, mortality charge, and service tax that are deducted from the premium.
- Guaranteed Return Details-If the investor is choosing the guaranteed return option, the illustration will also show the amount that compulsorily gets added to the fund value.
- Details of Fund and Maturity Value-One segment of the illustration specifies the fund value, surrender value, and the maturity value of the policy at the end of each year. This information is very useful and helps an investor make informed decisions about the term for which they wish to invest and the amount that should be invested in to get the desired returns.
- Net Yield After Deduction of All charges-The illustration also provides information about the net yield for the assumed growth rates of 4% and 8%. The net yield is calculated after considering the various charges associated with the ULIP. Insurance companies have the option to not deduct mortality charges while calculating the net yield.
To conclude, investors need to ensure that the benefit illustration that they use for decision-making has been prepared by the company and not the dealer. The illustration provides all the details that are essential for making informed decisions.