UNIT-LINKED INSURANCE PLANS AND PENSION PLANS
1. What are unit-linked insurance plans (Ulips)?
· These are insurance products coupled with market-linked investments.
· A part of the investment amount is used to provide life cover and the rest is invested in equity and debt securities.
· The investor can choose between bonds, equity and a mix of the two investments, as per the fund’s objective.
· In Ulips, the returns are based on the net asset value (NAV) of the units, just like in a mutual fund.
· In Ulips, there is no cap on the upper side returns, but there is no capital protection either.
· You have to consider factors such as the amount of investment, the choice of either single- or regular- premium plan, types of funds, and the level of protection you need.
· The premium usually provides insurance coverage for death and total permanent disability.
· With extra premium, you can also be covered for certain critical illnesses and other options.
· The death benefit payment will be the sum assured or the value of investment units at the time of claim, whichever is higher, or in some plans, can be both.
· Since these plans are linked to the unit price of an investment fund managed by the insurer, the total value of the plan fluctuates with the movements in the unit price.
· In such plans, investors must understand the elements of risks and therefore should be prepared to accept a certain degree of risk for obtaining higher capital and income growth.
· Therefore, the investors should consider their risk tolerance very carefully.
2. What are pension plans?
· Pension plans of insurance companies are designed to meet fund requirement during old age.
· A minimum guarantee is also offered with all pension plans.
· Partial withdrawals are, however, not allowed in pension plans.
· These plans require you to have a fix on your retirement age, also called ‘vesting age’.
· You can then decide the regular contribution you need to make.
· Most pension plans work in 2 phases –
o The accumulation phase, during which you contribute regularly and
o The pension or annuity phase, during which you receive regular retirement income.
· Accumulation phase is the stage where savings, investments or your contributions are made for creating the lump sum amount up to the ‘vesting age’.
· Pension phase is the stage which starts after reaching the ‘vesting age’, when you can withdraw up to 1/3rd of the fund value as a tax-free amount.
· With the rest of the amount, you can buy an annuity from the same insurer.
· Annuity is an investment that gives you a regular payment over a period decided by you.
· The payout from the annuity can be customized to meet your specific needs.