ULIP insurance is steadily attaining popularity amongst Indian investors for several reasons. Firstly, it is an ideal combination of life insurance and investment. This ensures that the family of the policyholder is financially secured in case of an unfortunate demise within the policy tenure. Simultaneously, the premium is invested into funds for earning returns after deducting applicable charges. Secondly, ULIP premium payments can ensure tax deductions of up to Rs. 1.5 lakh under Section 80C. The death benefit payout is tax-exempt under Section 10 (10D), and the maturity benefits are subject to certain terms and conditions.
While you can use a ULIP calculator to figure out the possible returns in the future, spare a thought to the sum assured. This is one of the most important terms as far as your ULIP investment is concerned. This article demystifies the term for a better understanding on your part. At the same time, it should be noted that the type of ULIP you choose influences the nature of the sum assured that you get.
What is the sum assured for a ULIP?
For any life insurance plan, the sum assured refers to the death benefit or lump sum payout given by the insurance company to the nominee in case of the policyholder’s death within the policy. It should also be noted that there is a direct link between the premium paid by the policyholder and the sum assured. The higher the former, the greater the latter. Suppose you get a term insurance policy with a sum assured of Rs. 1 crore. In case of your demise within the policy period, your nominee will get this sum. There are no maturity benefits paid if you outlive the policy term. Hence, the sum assured is the death benefit paid to the nominees in this scenario.
Yet, this needs to be clarified for ULIP investors since these plans have investment and life insurance components. Let us take an illustrative example to understand how it works for ULIPs. For a ULIP, the sum assured meaning changes depending on the ULIP type chosen, i.e. Type 1 or Type 2. Depending on the type of ULIP, the insurance company may pay out either the fund value or the death benefit. Here are some points that will drive the concept home.
- The entire value of a ULIP investment is the value of the fund invested in.
- For a Type 1 ULIP, the insurance company pays either the fund value or the sum assured to the beneficiaries, whichever is higher, upon the policyholder’s unfortunate death in the policy period. Suppose you have a sum assured amount of Rs. 50 lakh, while the fund value has grown to Rs. 40 lakh. In this scenario, the payout will be Rs 50 lakh upon your untimely demise, which is the sum assured However, if the fund’s value grows to Rs. 70 lakh, for instance, then this amount will be disbursed to the nominee instead.
- For a Type 2 ULIP, the sum assured is the fixed payout to the nominees in case of the policyholder’s unfortunate demise within the policy period. Irrespective of the fund value, the sum assured of the plan will be paid to the beneficiaries for these ULIPs.
- If the policyholder outlives the policy tenure, the sum assured will mean the fund value and any accumulated maturity benefits, if applicable.
- Type 1 ULIPs have a lower sum at risk for the insurance company since the fund value increases yearly, lowering the risk for the insurer. This is because the insurer has to pay the higher value of the two: the sum assured or the fund value.
- Type 2 ULIPs have a higher sum at risk for the insurance company since it remains constant throughout the policy period. The insurer has to pay the sum assured to the beneficiaries in case of the policyholder’s demise in the policy tenure. Hence, they come with higher mortality charges.
Different Payouts in ULIPs- How do they work?
Here are some details that you will find helpful:
- For death claims, the nominee will get the higher of either the sum assured or fund value if it is a Type 1 ULIP. If it is a Type 2 ULIP, the sum assured (and the fund value, if applicable) of the plan will be paid to the beneficiary.
- After surrendering a policy, you will get the fund value. This is calculated using the NAV of the units in your ownership. Certain applicable charges might be deducted from the payout.
- At maturity, the entire fund value is paid along with any accrued bonuses.
In this context, while getting a clearer picture of the sum assured, remember that the lock-in period for a ULIP is five years. Hence, it is not advisable to surrender your policy before this date. It will only lead to lower returns, and the maturity amount will be shifted to a discontinuance fund which will incur maintenance charges. You will only receive the net amount after completing the five-year lock-in period. Stay invested for the lock-in period and try to continue your investment thereafter to earn higher returns over a longer duration.
