ULIP

Dear Aspirants,

LIC AAO Exam is scheduled to take place in the month of March. For which the preparation has to be done at appropriate time. Considering this, for the upcoming LIC AAO exam, we are providing Study notes for Insurance. We hope that will help you.

What is a ULIP?

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. In a ULIP policy, the investment risk is generally borne by the investor.

What types of funds do ULIP offer?

Most insurers offer a wide range of funds to suit one's investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics.

1) Equity Funds (Medium to High risk) - Primarily invested in company stocks with the general aim of capital appreciation

2) Income, Fixed Interest and Bond Funds (Medium risk) - Invested in corporate bonds, government securities and other fixed income instruments

3) Cash Funds (Low risk) - Sometimes known as Money Market Funds — invested in cash, bank deposits and money market instruments

4) Balanced Funds (Medium risk) - Combining equity investment with fixed interest instruments

What are the charges, fees and deductions in a ULIP?

ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However insurers have the right to revise fees and charges over a period of time.

1) Premium Allocation Charge - This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.

2) Mortality Charges - These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc

3) Fund Management Fees - These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV) .

4) Policy/ Administration Charges - These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.

5) Surrender Charges - A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.

6) Fund Switching Charge - Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.

7) Service Tax Deductions - Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

The portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units

What is a Unit Fund?

The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund.

What is Fund Value?

The total value of the units in all the funds invested in by policy holder at the valuation date. The value of the units in each fund on the valuation date is calculated as–

(Number of units held by you in that fund) X (Corresponding unit price of that fund at the valuation date)

The fund value is the sum of the value of the units in all the funds that policy holder have invested in, as on the valuation date.

Thanks!