Additional Premiums on ULIPs – Explained
Paying regular premiums and making investments is a stable way of earning returns on your ULIP plans. For the uninitiated, a ULIP plan is a financial product that covers life insurance coverage and investment options under one plan. Thus, it provides the best of both to the investor without them having to deal with the hassle of two separate products. Many ULIP plans also have the feature of paying a top-up or additional premium to increase the benefits that one can gain on their ULIP plans. Should you opt for an additional premium and if so, what should you keep in mind before paying it? Here’s a lowdown on the same.
What is an additional premium in ULIPs?
An additional premium is a feature wherein the policyholder can pay an extra premium above their existing premium structure. This is an effective way of taking advantage if your funds are doing particularly well. Expectedly, the more you invest, the higher will be the returns you receive. The top-up premium invested in the ULIP plan also results in a higher sum assured amount.
Despite these benefits, one must ensure that they have reviewed the following factors before going ahead.
Keep these points in mind before paying an additional premium
The various charges that are present in a ULIP must be considered before paying a top-up premium. For instance, a mortality charge is applicable on the top-up premium. However, this charge would not be the same as it was at the initial premium. This charge will be calculated on the basis of the age at which you are paying the top-up premium and not the age at which you bought the plan.
Sum assured amount
The sum assured refers to the amount that the beneficiaries receive on the death of the policyholder. When you pay a top-up premium, the sum assured amount also increases. However, like the ULIP charges, the benefits of this aspect also depend on the age at which you pay the top-up premium. It does not take into consideration the age at which you bought the plan.
The lock-in period
ULIPs have a mandatory lock-in period of five years, as per IRDA norms. There cannot be any withdrawals on the ULIP plan during the lock-in period. It is only after this period is over that the investor can make partial withdrawals and surrender it without any major issues. With certain insurers, there might be lock-in periods involved with the top-up premium as well. You may not be able to enjoy the returns on your top-up premium for quite a while, even after the initial lock-in period has ended.
Hence, ensure to know the lock-in period norms before you pay an additional premium.
Terms and conditions
There might be several terms and conditions related to the top-up premium invested in the ULIP plan. For instance, some insurers ask that your total top-up premiums do not exceed a particular percentage of the total policy premiums. Other insurers may not allow you to make any top-up premiums in the last five years of the policy.
How to increase your ULIP benefits
Apart from paying the top-up premium, you can also do the following to increase the benefits of your ULIP plan:
Switch funds periodically
ULIPs offer the option to switch funds from equity to debt and vice versa as per the investor’s needs. To make the most of the market performance, you can switch your funds periodically.
Keep your money for the long term
If you want to achieve the best ULIP returns, you should keep the money parked in the instruments for a longer duration. This way, the money earns a large amount of returns due to compounding for an extended period of time.
Opt for a rider
If you are looking for increased financial protection, then you can direct your money to buy riders. These riders can help your loved ones in times of emergency. For instance, the accidental permanent death rider provides an additional lump sum amount in addition to the sum assured if the policyholder passes away in an accident.
Use the ULIP plan calculator
Before you finalise a ULIP plan, ensure to enter the variables of the plan into the ULIP calculator. You can then modify the variables to achieve the premium that suits your budget. This helps you optimise your ULIP budget.
Do read the terms and conditions regarding several aspects of the policy, such as the lock-in period, before investing.