A Unit-Linked Insurance Plan (ULIP) is a product that can play dual roles in your portfolio. It provides investment-linked returns to help meet your goals. It also ensures life insurance coverage to protect against unfortunate events. Additionally, it offers tax benefits too.
If you are planning to add ULIPs to your long-term investment plans, it is ideal to be clear about its types so you can choose a suitable option for your needs. Broadly, there are two types of ULIPs, referred to as type-1 and type-2 ULIP plans. Each one offers a specific feature that distinguishes it from the other.
But, before we explore the types, let us briefly understand what a ULIP is and how it works.
Understanding ULIPs
Like any other life insurance policy, you pay a premium for a ULIP. The money you pay for the ULIP is utilised in two main ways:
- First, it ensures the life insurance cover stays active. So, if the life insured passes away, the beneficiaries of the policy receive the sum assured amount. They can use this money to support their financial needs in the absence of the insured.
- Second, it is invested in the financial instruments as per the policyholder’s investment strategy. The returns depend on the instrument’s performance and help create the fund value of the ULIP. The policyholder can use these returns to fulfil their goals during their lifetime.
- You can pay the premiums for the ULIP over an extended period. Or, if you prefer one-time investment plans, you can pay the premiums in a lump sum.
Now, let’s explore the two types of ULIPs.
Type-1 ULIP
In a type-1 ULIP, the insurance company pays out either the sum assured or the fund value to the policy’s nominees in case of the insured’s demise. The nominees receive the amount which is higher among the two options.
Let’s understand this through a detailed example.
Mr Nilesh buys a type-1 ULIP with a fixed sum assured of ₹50 lakhs. In two years, the fund value of the ULIP becomes ₹15 lakhs. If an unfortunate event were to occur with Mr Nilesh at this point, his family would receive the sum assured (₹50 lakhs) and not the fund value (₹15 lakhs). This is because the former is the higher amount.
Now, let’s suppose nothing happens to Mr Nilesh and his ULIP funds grow to ₹65 lakhs in the next 12 years. If Mr Nilesh passes away at this stage, the beneficiaries of the life insurance plan will receive the higher of the two amounts, i.e., the fund value, which is ₹65 lakhs.
Type-2 ULIP
In a type-2 ULIP plan, the nominees receive a fixed sum assured amount. Continuing the above example, if Mr Nilesh had bought a type-2 ULIP, his family would receive ₹50 lakhs regardless of the fund value of the ULIP. This ensures that the family has a solid financial backup even when life’s uncertainties come knocking.
In some type-2 ULIP plans, the insurer will pay the total of both, i.e. the sum assured and the fund value. So, if the sum assured is ₹50 lakhs and the fund value ₹25 lakhs, the family will receive ₹75 lakhs in case of the life insured’s demise. This increases the financial support the family will receive to a considerable extent.
To make calculations of this sort easier, use a ULIP calculator. This tool gives you quick estimates of your returns at different stages of your ULIP to help you make better decisions.
Which ULIP is Right for You?
While ULIPs are beneficial in general, it is important to make the right choice between type-1 and type-2 ULIPs. Your choice can make a huge impact on your family’s financial future.
So, what should you consider?
Mortality charges
With a type-1 ULIP, you are likely to pay a lower mortality charge with time. This is because the ‘sum at risk’ in a type-1 ULIP becomes lower over the years. As the fund value increases each year, the sum at risk decreases. The lower the sum at risk, the lesser the mortality charge.
Between type-1 and type-2 ULIP plans, the latter may have a consistent mortality charge. This is because the sum at risk in a type-2 ULIP stays constant. This means the mortality charges remain the same throughout the tenure.
Benefit amount
You must also consider the total benefits you want your family to receive in your absence. With some type-2 ULIPs, your family is likely to receive a higher amount, equal to the total of the fund value and the sum assured. This allows them to fulfil more than just their basic needs. They can use the surplus funds to support their higher education plans, give a kickstart to their career dreams, pay off long-standing loans, and more. Hence, when choosing between type-1 and type-2 ULIP plans, consider the total benefits as well.
To Sum Up
A ULIP plan is a useful addition to your financial portfolio. With its extensive list of benefits, a ULIP can ensure financial security for your dreams as well as your family’s future.
Each type of ULIP plan offers its specific type of benefits. Consider your financial needs and objectives, your budget, and your family’s future goals before choosing between type-1 and type-2 ULIPs. By making a well-informed decision, you can ensure a financially healthy future for yourself and your loved ones.
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