The world of insurance is full of jargons that are difficult for a layman to understand. Especially if you are entering this market for the first time, the difficulties are more. But these terms are equally important to know as a better understanding will help you to make the right decision. A unit linked insurance plan (ULIP) is one that comes with dual benefits of insurance as well as investment. It is a product offered by insurance companies that utilises premium paid by customer partially as insurance and partially as an investment over a lock-in period of 5 years. There are three types of funds in which you may choose to invest and these are debt funds, equity funds and balanced funds. Before you buy a ULIP, here is a glossary of jargons that you must know.
- Sum assured – Sum assured is the amount that is guaranteed to the nominee in case the untimely demise of the policyholder before the maturity date.
- Lock-in period – Lock-in period is the timeframe for which policyholder is not allowed to withdraw money. Every tax-saving plan comes with a predetermined lock-in period, for ULIP it is 5 years.
- Net Asset Value (NAV) – NAV as per the name suggest is the per-unit value of the fund’s asset that is calculated after deducting associated liabilities. The formula to calculate NAV is, assets minus liabilities divided by the number of units.
- Top-up premium – The additional sum paid as per the convenience of the policyholder at irregular intervals over the pre-decided premium amount is the top-up premium.
- Partial withdrawal facility – This facility enables the policyholder to withdraw a part of the investment during the ULIP’s tenure after 5 years.
- Sales illustration – Sales illustrations is an informative document that explains the working of the life insurance plan.
- Fund options – ULIPs use a significant part of the premium to invest in market funds. Usually, it enables you to invest in 5 to 7 funds to divide the risk.
- Switching options – As discussed earlier ULIPs offer you three avenues in funds. You can switch between the funds depending on the returns or market conditions. Usually, plans offer this facility free of cost every year.
- Premium redirections – This feature allows you to re-allocate the premiums partially or fully to another unit as per your risk appetite and market conditions.
- Death benefit – It is the pre-decided amount that the insurer agrees to pay in case of the untimely death of the policyholder before the maturity date of the policy.
- Maturity benefit – This is the total amount to be paid at the maturity date of the policy to the policyholder.
- Survival benefit – It is a specific amount that is paid to the policyholder on intervals for survival during the policy tenure.
- Surrender value – In case the policyholder wishes to withdraw money before the completion of the lock-in period, they must pay the surrender value. It can be calculated as the current fund value minus application deduction.
- Guaranteed surrender value – Guaranteed surrender value is the amount the policyholder pays on surrendering the policy, it is mentioned in the brochure of the insurance company you choose to buy from and differs from one insurer to another.
These are some basic jargons that will help you to understand the ULIP offerings.