Before you invest in a financial product, you must check not only the returns you can expect but also the different ways in which your returns will be processed. In a life insurance policy, the beneficiary receives a lump sum amount in the event of the death of the policyholder. However, if the life insurance plan also has an investment element attached to it, then the lump sum amount that the beneficiaries are liable to receive can differ slightly. Along with the sum assured amount, there is also the fund value of the ULIP value that has to be considered. There are broadly two types of ULIP policies that deal with the subject of the sum assured amount in two different manners. Let’s learn more about the same below.
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How does a ULIP work?
The premium of a ULIP is divided into two. One portion of the premium is used to build the life cover and the other portion is used to invest in financial instruments. If a tragic event leads to the policyholder’s demise, their loved ones receive the life insurance corpus. This amount can immensely help your family to deal with the financial grievances that can come up in your absence. The financial instruments your money goes into can be either equity funds, debt funds, or a combination of both. As per your risk appetite, you can opt for the appropriate fund options.
The invested fund accumulates returns as per its performance in the market. When the ULIP policy matures or you surrender it, you receive the whole of the accumulated returns as per policy wordings. In the event of the policyholder’s demise, however, the beneficiaries receive the fund value only under certain conditions in some policies.
Type I ULIPs
In any life insurance policy, including ULIPs, the mortality charges are levied as per the sum at risk for the insurance company. The sum at risk refers to the amount that the insurer pays from their own pockets. The higher the sum at risk, the more will be the mortality charge.
In Type I ULIP policy, the sum at risk changes throughout the policy tenure as the fund value also changes. The sum at risk for the insurer decreases with the growth of the fund value. If the policyholder passes away, the insurer pays the beneficiaries the amount which is higher in value among the two, the sum at risk, or the fund value. So, when the fund value becomes higher than the sum at risk, the insurer is exempted from paying anything from their own pockets.
An example would illustrate this better:
Rajesh has taken a ULIP policy to secure the future of his loved ones. The sum assured for this policy is Rs 90 lakhs. Rajesh’s premium payment is also used to invest in the market. After a period of six years, the value of the ULIP funds is Rs 40 lakhs. This means the sum at risk for the insurer is Rs 50 lakhs. If Rajesh were to pass away at this point, his beneficiaries would receive Rs 50 lakhs as compensation.
If Rajesh were to pass away after 10 years of the policy, when the fund value has grown to Rs 65 lakhs, the beneficiaries would receive Rs 65 lakhs as compensation. This means that there is no sum at risk for the insurer.
Type II ULIPs
In Type II ULIPs, the beneficiaries receive the total amount obtained when the sum assured is added to the value of the ULIP funds. The sum at risk stays the same in this type of policy. Taking the previous example, if Rajesh were to pass away after 12 years of the policy, his beneficiaries would get Rs 1.55 crores. This amount includes the sum assured amount plus the fund value at that point of the policy’s tenure.
Which policy should you choose?
If you are looking for extended benefits for your loved ones, then Type II ULIPs would be preferable for you. However, if you are looking for a lower mortality charge, then Type I ULIP is the better option for you. It is best to consult a financial expert and get professional advice on which of the two types of ULIP policies is the best for you.
