A Unit-linked Insurance Plan or a ULIP is an insurance product that also offers the chance to invest in market-linked opportunities. However, before you invest, you may want to get a clear summary of the investment journey. A benefit illustration can help serve this purpose. A ULIP’s benefit illustration is a document that outlines the details of your investments, including the charges, potential returns, estimated growth rate, and more, over the tenure of the plan.
Knowing how to read the ULIP plan’s benefit illustration can help you make informed decisions and optimise your investments.
What is a Benefit Illustration?
It is a document provided by the insurer that outlines how your ULIP investments might perform over the policy term. It gives a hypothetical picture of your policy's value at different stages of the plan based on assumed rates of return along with the breakdown of charges and net returns. The benefit illustration is shared with the policyholder when they buy a Unit-linked Life Insurance online or offline.
The figures presented in the illustration are not a guarantee of future earnings. ULIP investments are subject to market risks and the returns depend on the fund performance.
Instead, you can consider the benefit illustration as a tool that helps you understand the potential outcome of your investment so that you can plan better. For instance, if your ULIP returns in 5 years do not align with your goals, you can switch funds or opt for another investment strategy. This helps you get a step closer to your goals.
Now, let’s see how to read a ULIP plan’s benefit illustration for better financial planning.
Reading a ULIP Benefit Illustration - A Guide
A benefit illustration will have several elements, some of which may not be familiar to you. Here’s a guide on the same, so that you can effectively read the illustration and implement the right strategies.
Annualised Premium
The first column will show the yearly premium you must pay. Depending on your policy terms and your budget, you can pay the premium monthly, quarterly, semi-annually, or annually.
Premium Allocation Charge
Shown in the second column, the premium allocation charge is a percentage deducted from your premium upfront. The investment amount is what’s left after this deduction.
Investment Amount
Another column will display the actual amount going into the investment after deducting the allocation charge. This is the money that has the potential to grow over time.
Guaranteed Additions (if applicable)
If you have opted for a guaranteed ULIP, the benefit illustration will also include a column that shows the additional amount added to the fund value.
Charges
The benefit illustration will display various charges, such as:
Policy Administration Charges
A fee for managing the policy, usually a fixed amount or a percentage of the sum assured.
Fund Management Charges
Charged as a percentage; usually adjusted on a daily basis in the Net Asset Value (NAV).
Mortality Charge
The cost of the life insurance coverage; depends on your age, policy term, the sum assured, and many other factors.
Service Tax
Refers to the applicable taxes on the charges mentioned above.
Net Yield
This indicates your actual return after deducting all charges. It is shown for different return rates as assumed by the insurer. If the charges reduce an assumed 8% return to 6.25%, the ‘Reduction in Yield (RIY)’ is 1.75%. The lower the RIY, the higher your actual earnings.
- How much of my premium is actually invested?
- What will my fund value look like after 5, 10, or 20 years?
- What benefits will my nominee receive?
- How do ULIP charges affect my investment amount and potential returns?
Fund Value
This shows how your investment has grown at assumed rates and after the charges have been deducted.
Surrender Value
The amount you would get if you discontinued the life insurance plan that year, after applicable charges.
Death Benefit
The sum your nominee would receive in case of your unfortunate demise during the tenure.
In addition to the ULIP benefit illustration, you must also learn about ULIP taxation as an informed investor. As ULIPs invest in market-linked products, their taxation can be different from that of a regular life insurance plan.
Why Understanding the ULIP Benefit Illustration is Important
When you know how to read the ULIP plan’s benefit illustration, you can answer questions like:
When you are planning for long-term goals, these questions can help you make informed choices. They can help you curate the right investment journey for various goals, like retirement, your child’s education, the purchase of a house, and more.
You can also use a ULIP plan calculator to get an estimate of the returns. However, for a detailed and realistic picture, the benefit illustration is ideal.
Hence, whether you are buying life insurance online or offline, remember to review the ULIP benefit illustration, so you have a clear idea of how your premiums are used, how the returns are calculated, what costs are involved, and more.
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