ULIPs offer excellent returns for the future while also ensuring life insurance coverage for investors alongside. You should know about several key terms associated with ULIPs, including the fund value and sum assured. So what differentiates these terminologies? Here's finding out.
ULIP Definition
A ULIP is a hybrid and innovative investment option that combines investment and life insurance. The premium is invested (after deducting all applicable charges) in earning returns through the financial markets while providing life coverage simultaneously. The amount is deployed in market-linked funds and other instruments, ensuring that the returns you receive are tied to diverse market conditions. Policyholders can select from debt, equity, a mixture of both funds, and liquid funds.
Every ULIP provider offers unique sets of funds, and after policyholders choose their preferred investment instrument, they receive a specific number of allocated units of the same. ULIPs come with lock-in periods of 5 years as per the rules set by the IRDAI (Insurance Regulatory and Development Authority of India). You can use a ULIP return calculator to work out your returns from these investments since the premium will be invested in funds for growing wealth in the future.
What is Sum Assured?
The sum assured in a ULIP is the amount paid to the policyholder's family or nominees by the insurance company in case of the insured's demise within the policy tenure. It is the amount promised or guaranteed by the insurance company to the policyholders' nominees if any such insured event occurs.
This amount is free from taxation as per Section 10 (10D) of the Income Tax Act of 1961, provided that it is at least 10 times the annual premium for the policy. For instance, suppose a ULIP comes with a sum assured of Rs. 30 lakh, then it means that this is the money to be paid to the policyholder's family by the insurance company in case of their death.
What Is Fund Value, and how is it calculated?
Whenever a ULIP investment is made, you will get a specific number of units in the investment fund. The total value of the same in the portfolio is the value of the fund in this case. Hence, this indicates that the returns you get from the investment will be the fund value at maturity. To know this concept better, you should know about the NAV (net asset value).
The NAV of the ULIP will depend upon the market and overall performance. The ULIP fund value can be worked out by factoring in the fund's NAV. Based on the IRDAI's prevailing regulations, insurers will release the NAV of every fund daily. The calculation of the NAV is done through the given formula-
NAV = (Assets + Liabilities) / (Number of Outstanding Units)
The fund value calculation procedure is not complicated. It is the total of the NAV of every fund unit on any particular day, and the number of units held. For example, suppose you have 100 fund units in your portfolio. And also, assume a NAV of Rs. 10. Hence, the fund value will be the NAV * unit number, i.e. 100 *10, i.e. ₹ 1,000. The fund value will keep changing on a daily basis, with changes in the NAV as well.
What are the different payout Scenarios in a ULIP?
There are numerous scenarios for payouts in the case of ULIPs:
- The Policyholder's Death- If there is an unfortunate demise of the policyholder within the policy's duration/tenure, then their nominees/beneficiaries will get a sum equivalent to the higher figure of either the fund value or the sum assured. Both are sometimes paid out based on the conditions of the plan. For instance, suppose the sum assured of a policy stands at Rs. 20 lakh and the accumulated fund value stands at Rs. 40 lakh. In this scenario, the latter amount, being the higher of the two, will be paid out to the nominees of the policyholder by the insurance company upon the demise of the policyholder.
- ULIP Maturity- If the policyholder survives and outlives the ULIP tenure, the policy reaches maturity. Upon the maturity of the same, the fund value will be paid to the insured accordingly. This means that the value of the accumulated funds, as per the calculation given above, will be paid out to the policyholder if they survive the entire policy tenure and it reaches the maturity date.
Wrapping Up
Now that you know the difference between the fund value and the sum assured of a ULIP, you should invest wisely to get a high fund value, but also ensure that the latter is high enough to cover your family's needs in case of your unfortunate demise.
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