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What are loyalty additions, and how do they work in a ULIP?

Loyalty additions are additional payouts that life insurance policies offer on spending a course with the policy. Read here to learn more about Loyalty Additions and how they work in a ULIP.

  • 6,300 Views | Updated on: Dec 28, 2023

You can earn both investing and insurance benefits through unit-linked insurance plans (ULIPs). With a ULIP, you can increase your wealth while maintaining your life insurance coverage. ULIPs are used to invest your money in financial instruments (equity funds, debt funds, or a combination of both). The rewards on your investment will depend on how well your select funds perform. At times, loyalty enhancements can somewhat boost these returns.

Even though they go by several names, such as additional allocation, extra allocation, and fund boosters, loyalty ads all have the same function. So, let’s first comprehend how a ULIP functions before examining the role that loyalty additions play.

Operation of A ULIP

To help you reach your financial goals, ULIP plans act as both a goal-based investing opportunity and an insurance option. It’s important to understand where your money will be invested before investing in a ULIP.

Like any other insurance policy, your Unit Linked Insurance Plan will need you to pay a premium. The funds you choose will be purchased with the premium payments you make. If you have a strong tolerance for risk, you can choose to invest in equities funds. If you want to avoid taking on too much risk, you can invest your money in a debt fund.

A blend of debt and equity funds is another option for investors who want to reap the benefits of returns without taking on too much risk. Because the investments are made to help you achieve your financial goals, you can choose the type of funds in which your money should be invested.

Insurance companies allow you to occasionally swap between funds within the terms and conditions set forth therein. You are free to change according to market movements and your investing goals without incurring any tax consequences for doing so.

The insurer pays you the fund value accumulated during the insurance term when the policy matures. Through the use of an online ULIP Plan Calculator, this value can also be predicted before purchasing the plan. It may be distributed as a single payment or in ongoing instalments. Some ULIP insurance plans can also be eligible for a loyalty addition.

How Do Loyalty Additions Work?

Simply put, loyalty addition is an extra sum of money that your insurance provider gives you in exchange for continuing to use their services. The sum represents a part of your current portfolio of investments.

Loyalty ads might be seen as a benefit for keeping your ULIP insurance plan active and avoiding early termination. The insured is encouraged to commit to the program by loyalty additions, which also encourage him to pay premiums on time.

Insurance companies often offer loyalty additions toward the end of the policy term. While some insurance providers pay loyalty bonuses after the 5-year lock-in period has passed, others reserve this benefit for when the policy has reached its maturity. Investors eagerly anticipate getting loyalty additions upon maturity. The insurance industry uses this as a successful strategy to retain customers during the duration of the policy.

What Factors Determine Loyalty Additions?

Loyalty additions in ULIP insurance policies can be calculated in one of two ways: either as a percentage of the fund value or as a proportion of the premium paid.

Assume, for the sake of clarity, that you pay a ₹2 lakh rupee premium annually into your ULIP insurance plan. When you retain your insurance coverage for a long time, let’s say six years, your insurance company rewards you with 3% of the premium. A total of ₹6,000, or 3% of ₹2 lakhs, will be added to your investment fund.

It is crucial to realise that the loyalty addition you will earn is not based on the portfolio’s performance in terms of investments and insurance. The performance of your assets has no bearing on it; it is just a fixed percentage set by the insurance, as was previously explained.

The insurance provider merely determines the sum based on several factors, such as the frequency and duration of premium payments, their size, the duration of the policy, and the intervals between the guaranteed loyalty increments.

Are Loyalty Upgrades Beneficial to You?

A public sector insurer often starts giving policyholders loyalty additions after the tenth year. In this instance, the insurer determines the loyalty addition by comparing the insurance company’s performance to the guaranteed additions. These supplemental benefits accrue over the policy’s duration and are paid at maturity. Loyalty addition is only available if you have owned the policy for at least ten years.

Although the concept of a loyalty addition may seem desirable, it shouldn’t be the only criterion utilised to assess a ULIP program’s value. A policyholder investing in a ULIP insurance plan must continually assess the more important factors, such as cover quantity, premiums, fund performance, claim procedure, and then take the right decision.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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