UNIT-linked insurance plan which is popularly known as 'ULIP' is the flavour of the season. The conventional Insurance policies have a fixed relationship between the premium and the sum assured. Whereas ULIP allows the policyholder to choose his own sum assured within certain limits, for any given premium. The policyholder may then have the right to adjust his sum assured up or down, again within certain limits according to his circumstances.
Features of a Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that provides for the protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time.
ULIP provides multiple benefits to the consumer. The benefits include:
" Life protection
" Investment and Savings
" Flexibility - in Sum assured, to increase the sum assured, investment, etc
" Adjustable Life Cover
" Investment Options
" Transparency
" Options to take additional cover against - Death due to accident, Disability, Critical illness etc
" Liquidity
" Tax planning
Unit linked Insurance plan provides insurance protection against the risk of death combined with a provision for long term investment in the equity market, which are structured differently. Ulip Insurance India are basically an investment type of plan, wherein the Life assured decides the quantum of contribution which he can set aside on a regular basis towards premium. He also has the flexibility to decide the risk cover, i.e the Sum Assured for his policy.
Based on the Sum assured and the contribution for the policy, insurer deducts charges towards life insurance mortality charges i.e, risk premium, administration charges and fund management charges. The rest of the premium is invested in funds that invest money in stocks or bonds. The policyholder's share in the fund is represented by the number of units held in his account. The value of the unit is determined by the total value of all the investments made by the fund divided by the total number of units.
At any point of time i.e., maturity or surrender, the cash value will be equivalent to the number of units held by the insured multiplied by the unit price. In case of death claim, it will be unit value, plus the sum assured if any under the policy.
Pricing of Units
Method of pricing the units depend on whether the company is purchasing or selling assets (stocks). While purchasing of assets the units will be priced on Appropriation basis and while selling of assets the Expropriation basis of pricing will be applied.
Different method of pricing is adopted to safeguard the existing policyholders from the inflow and outflow of funds due to purchase/sale of units.
Appropriation Price
This will be applied when the fund is expanding. In this method of pricing, the unit price is calculated as follows:
Unit Price = (Market value of fund + expenses for purchase of assets + current assets + income - charges - current liabilities) / Number of units in the fund.
Expropriation Price
Expropriation Price will be applied when the fund is contracting. In this method of pricing, the unit price is calculated as follows:
Unit Price = (Market value of fund - expenses for sale of assets + current assets + income - charges - current liabilities) / Number of units in the fund.
The bid/offer spread
There are two different prices for a stock. One is a Bid price and the other is Offer price. Bid price is the price at which you can sell the shares and the offer price is the price at which you can buy them. The first is always lower than the second, and the difference between them is called the spread.
Insurance companies offer a range of funds like Growth Fund (Equity Fund), Balanced Fund, Secured Fund, Income Fund etc. The insured can direct the company to invest his contribution in the fund of his choice.
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