How Much Of The Premium Is Used To Purchase Units Of ULIP?

As discussed earlier, the total amount of premium paid for ULIPs, a part goes for insurance coverage and the rest goes to investing in market-linked funds. But how much of the premium is allocated towards the purchase of these units? Let us discuss that.

The total amount of premium paid is not used to buy units. Insurers allot units on the portion of the premium remaining after providing (read deducting) for various charges and fees. But the portion of the total premium used to buy units differs from product to product. 

The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units. This practice brings you to the concept of “front loading” of charges.

Here, the power of compounding works on a lower amount which is invested in the markets so in the long run ULIPs have potential to create lower amounts of wealth than mutual funds wherein the charges are recovered from fund value on a daily basis rather than being front loaded.

What should one verify before signing the proposal for a ULIP?

You should look out or understand first the following before deciding to buy any ULIP policy: -

i. All types of charges applicable in the policy

ii. features and benefits

iii. Lock-in-period

iv. Liquidity rules / charges and payment on premature withdrawal 

v. limitations and exclusions

vi. Lapsation policy and its consequences

vii. Benefit Illustration projecting benefits payable in two scenarios of 4% and 80% returns as prescribed by the life insurance council.

In a nutshell, ULIPs as a policy choice are good if you are comfortable paying high charges upfront in lieu of combined benefit of investment and insurance and commensurate market linked high returns.