Are you looking for a life insurance plan that offers more than just the traditional life cover? Then, you may be interested in a ULIP or Unit-Linked Insurance Plan. These are offered by life insurance companies and aim to cover two important elements of financial planning – insurance and investment.
Because of the dual purpose it serves, the workings of a ULIP can get confusing for some people. The fund value and the sum assured – the two vital terms in a ULIP- are often used synonymously when talking about the benefits of a ULIP. However, there is a difference between these two terms, as we shall see in the following article.
How does a ULIP work?
When you buy a ULIP, you have the opportunity to invest in equity or debt instruments according to your risk appetite. The funds for these investments are taken from your premium. This premium also serves as a way to build the life cover – or the sum assured – amount. If you are unsure as to which kind of fund you should choose, you can use a ULIP return calculator. This tool provides approximate returns for high-risk as well as risk-free instruments.
The insurer takes a certain percentage of money from your premium and then pools it with money from other policyholders. This lump-sum money is then invested into debt options or equities. Your share in the total lump-sum amount decides the number of units you are allotted. The returns on the plan depend on the market highs and lows in the case of equity and the rising/falling interest rates in the case of debt instruments.
What is the fund value?
As the tenure of your ULIP passes, the money in the investment plan also grows gradually. In fact, it is advised that the money be held for the long term so that it can effectively beat temporary market volatility. Furthermore, making long-term investments also ensures that your money receives the most of compounding.
Thus, the investment fund that gets accumulated as a result of market gains and compounding is referred to as the fund value. The fund value changes at different points in time.
When the ULIP matures, the policyholder receives the total fund amount as its value stands at the time. The major determinants of the fund value are the tenure, the premium being paid, and the market ups and downs. That is why the ULIP return calculator asks for the premium amount, the tenure, and the growth rate.
What is the sum assured?
The sum assured refers to the minimum amount that the beneficiaries of the plan are eligible to receive on the demise of the policyholder. The sum assured is present in all life insurance companies and is financed through the payment of regular premiums. More often than not, the sum assured is the main meaning behind buying life insurance plans such as a ULIP.
The minimum sum assured amount is not affected by any external influences. It stays constant throughout the policy tenure.
Now, whether the sum assured and the fund value merge in the ULIP plan depends on the kind of plan you have chosen.
Fund value and sum assured – Where do they merge?
There are two types of ULIPs that can be distinguished on the life cover amount they provide.
- The first type of ULIPs is where the sum assured amount is fixed. The fund value does not have any effect on the sum assured amount. For instance, if the sum assured is Rs 50 lakhs, then the nominees receive Rs 50 lakhs on the demise of the policyholder. This is valid if the demise occurs during the tenure of the plan.
- The second type of ULIP is where the fund value is added to the sum assured in the event of the demise of the life insured. So, if the sum assured is Rs 50 lakhs, and the fund value is Rs 20 lakhs, then the total life cover amount that the nominees receive is Rs 70 lakhs. This may not be applicable if the fund value is higher than the sum assured.
It is best to reach out to your insurance provider and read the policy wordings to know the meaning of the ULIP clauses in your policy.
Paul is an content marketing strategist and serial entrepreneur.