Unit-Linked Insurance Plan (ULIP) is an insurance product that also offers investment opportunities. It is a type of linked plan where a portion of the premium is invested in different funds on the basis of the policyholder’s preference. A portion of your premium is invested toward your life insurance coverage, while the remaining amount is invested in equities, bonds, and other market-linked instruments.
What is Sum Assured in ULIP?
In a Unit Linked Insurance Plan (ULIP), the sum assured is the minimum guaranteed amount that the insurer promises to pay to the nominee if the policyholder passes away during the policy term. It provides a financial cushion to the family, ensuring a fixed payout irrespective of the performance of the market-linked investment component in the ULIP.
The sum assured typically increases with higher premium contributions. However, ULIPs combine both insurance and investment, which often leads to confusion when comparing them with traditional life insurance. To clarify this distinction, it’s helpful to examine how a ULIP differs from a pure term insurance plan.
Term Insurance Plan
In the case of a term insurance plan, the sum assured is a predetermined amount that is specified in the policy document. The insurance company has to pay the sum assured to the nominee in the event of death during the policy term.
For instance, if you pick a term insurance plan with a sum assured cover of ₹1 crore, your loved ones will receive this entire amount in the unfortunate event of your demise within the policy term. Under this plan, there is no maturity benefit; therefore, the entire premium amount goes to cover the insured’s life. Therefore, a term insurance plan is a cost-effective insurance that is known for a higher sum assured value.
ULIP
In sum assured in ULIP, the fund value at the time of claim settlement is also included. Depending on the policy terms, the insurance provider can offer your nominee the sum assured or the fund value or the higher of the two. By choosing an adequate sum assured in ULIP, you can ensure that your family’s financial future is secure, providing peace of mind and stability during challenging times.
In addition, ULIP also offers the policyholder a death or maturity benefit, and the sum assured is paid after maturity. Along with the sum assured, policyholders get various other benefits, such as a bonus, which gets added to the sum assured after a few years of the policy.
How does Sum Assured in ULIP Work?
As you know, the sum assured is a fixed amount of money paid to the beneficiary in case of your unfortunate demise during the policy term. When you purchase the ULIP, you choose the sum assured amount. This amount is guaranteed by the insurer, unlike the fund value, which fluctuates based on market performance.
If you pass away within the policy term, your beneficiaries will receive the sum assured amount irrespective of the ULIP’s fund value at that time. This ensures your loved ones have a predetermined amount of money to rely on.
In some cases, ULIPs offer different payout options for the death benefit. These might include getting only the sum assured or receiving the higher amount between the sum assured and the fund value.
How is the Sum Assured Different from the Fund Value in a ULIP?
Many people find finance-related terminologies confusing. The difference between the “Fund Value” and the “Sum Assured in ULIP” is one of the most misunderstood aspects.
The total value of your invested money at a given point in time is known as the fund value. It is determined as per the Net Asset Value (NAV) of your assets and is calculated by multiplying the NAV by the total number of units held.
NAV=(Assets – Liabilities) / Total Shares
The sum assured in ULIP is the predetermined amount of money that your loved ones will receive as a death benefit. However, the fund value keeps changing as per the fluctuations of the market.
Since ULIP serves two purposes, investment, and insurance, there are two different payout components involved. While the “Sum Assured” comes into effect after the policyholder’s demise during the policy term, the “Fund Value” is paid out if the policyholder survives the policy period or surrenders their policy. Sum Assured is the minimum guaranteed death benefit paid out to the policyholder’s nominee/beneficiaries.
Tax Exemption on Sum Assured in ULIP Investments
ULIP tax benefits under the Indian Income Tax Act are primarily based on two key provisions: Section 80C, which allows a tax deduction on life insurance premiums, and Section 80CCC, which exempts the amount contributed to pension plans from taxation. Section 80C allows you to deduct up to ₹1.5 lakh per year from your taxable income for premiums paid towards ULIPs.
As a policyholder, you must take the following things into account:
- The total tax benefit you can claim on ULIPs is capped at ₹1.5 lakh annually, regardless of the total premium amount.
- To qualify for the full tax benefit, your annual ULIP premium should be less than 10% of the sum assured (death benefit) you choose. For example, if your sum assured is ₹15 lakh, and your annual premium is less than ₹1.5 lakh, you can claim the entire premium amount for a tax deduction.
- If your annual premium is higher than the limit (e.g., ₹3 lakh for a ₹15 lakh sum assured), the maximum tax benefit you can still claim is ₹1.5 lakh.
To avail of the tax benefit, your ULIP must remain active for at least five years. Stopping premium payments before the five-year mark can lead to the reversal of tax benefits claimed in previous years. Therefore, for the most significant tax advantages, ensure you have a long-term investment horizon and consistently pay premiums throughout the policy term.
How Do You Get Paid in Case of ULIP?
The payment method in ULIP depends on the type of claim.
In Case of a Death Claim
The nominee of the policyholder gets either sum assured or fund value, whichever is higher.
In Case of Policy Surrender
ULIPs have a 5-year lock-in period, after which you can surrender a policy. The insurance company will cut the surrender charges and pay you the fund value on the day of surrender. This will be calculated as per the NAV of your units.
In the Case of Policy Maturity
The total fund value of the sum assured in ULIP is paid to you at the time of maturity. This includes your invested capital, the returns on your investment, and any bonuses accrued over time.
Points to Know Before Investing in ULIP
- Sum Assured: ULIP offers a guaranteed sum assured amount, which is paid to the policyholder’s family in the event of their demise during the policy term.
- Lock-in Period: The policy comes with a mandatory lock-in period of five years, during which no withdrawals are allowed.
- Grace Period: For premium payments, the grace period is 15 days for monthly modes and 30 days for all other payment modes.
- Policy Revival: If the policy is discontinued after the five-year lock-in period, it can still be revived within two years from the date of discontinuation.
- Partial Withdrawals: Allowed only after the completion of five years from the policy start date.
- Child Plans: In ULIP-based child policies, no withdrawals are permitted until the child turns 18.
- Holistic Investment Approach: ULIPs provide both investment and insurance benefits. It is important to view them as part of a comprehensive financial plan to meet both long-term wealth creation and security goals.
Wrapping Up
The sum assured in ULIP (Unit Linked Insurance Plan) serves as a pivotal component, offering financial security and investment opportunities simultaneously. By providing a predetermined amount to the nominee in the event of the policyholder’s demise, it ensures protection. Additionally, it functions as an investment tool, allowing policyholders to grow their wealth through market-linked funds. Understanding the importance and implications of the sum assured in ULIP is crucial for making an informed decision that aligns with one’s financial goals and risk appetite. Therefore, whether purchasing online or offline, the sum assured in ULIP remains a cornerstone, providing both protection and investment benefits.
FAQs on Sum Assured in ULIP
1
What is the sum assured in ULIP?
The sum assured in ULIP is the minimum amount guaranteed to be paid to the policyholder’s nominee in case of the policyholder’s demise.
2
How is the sum assured determined in ULIPs?
The sum assured in ULIPs is typically determined based on factors like age, income, and financial goals chosen by the policyholder at the time of policy inception.
3
Can I change the sum assured in my ULIP policy?
Yes, you can usually change the sum assured in ULIP policy, subject to certain terms and conditions outlined by the insurance provider.
4
Is the sum assured fixed throughout the ULIP term?
The sum assured in ULIP can be fixed or flexible depending on the variant chosen; some ULIPs offer the flexibility to change the sum assured during the policy term.
5
What is the base sum assured in ULIP?
The base sum assured in ULIP represents the minimum guaranteed amount payable to the nominee upon the policyholder’s demise.
6
Are there any tax implications related to the sum assured in ULIPs?
Tax implications related to the sum assured in ULIPs may vary based on prevailing tax laws and regulations; it is advisable to consult a tax advisor for personalized guidance
7
How does the sum assured affect the maturity benefits of a ULIP?
The sum assured in ULIP can impact its maturity benefits, with a higher sum assured often leading to potentially higher returns upon maturity.
8
What factors should I consider when choosing the sum assured in my ULIP policy?
When choosing the sum assured in ULIP policy, consider factors such as your financial obligations, risk appetite, future financial goals, and your family’s financial needs in your absence.
