The ULIPs....Part I

Unit Linked Insurance policies (ULIP) are the insurance policies that have a linkage with the stock market.  There has been an increased activity on this count and lets see the fundamental concepts of ULIPs and how they differ from the normal insurance products that have been offered till now called as conventional insurance policies.

In Indian financial world, the word unit was more popularized by Unit trust of India.  Units are the constituent elements of a mutual fund.  At a basic level, mutual fund is the collection (portfolio) of different securities that have differing risk characteristics aimed at maximising returns and minimizing the risk.  This is done by way of portfolio management carried out by specialized companies called as Asset Management Companies (AMCs).  The same unit is what we use in ULIPs.

In advanced countries, these are called as Variable life products and Universal Variable Life products ( VL & UVL), though at times ULIPs is also used.  

The primary difference between the conservative products and the unit link products is the transfer of risk. Other than the term insurance policies, the premium you pay consists of two elements. 1.  risk premium   2.  savings premium.   For term insurance policies, there is no savings component in general and only risk  premium will be there.  The insurance company by investing the savings premium in eligible investment avenues, generates a return on the funds. This is paid as bonus on policies after deducting the operating costs of the company.   Traditionally the insurance companies try to maintain a average return on compounding which gives a better return.  Here the missing element is, the customer does not know where his premiums are being invested.  In ULIPs, the savings premium is invested as decided by the customer. The customer has a choice of  different funds which differ in their risk character along with an option to switch the funds.    The other area of transparency is the costs.  Various charges such as administrative charges, fund management charges and all are pre declared and customer can know how much is the cost deducted.  This transparency is missing in the traditional products.    Read part II of ULIPs for why ULIPs and What you need to know about your ULIPs.