A ULIP plan is a financial instrument offered by many insurance companies. It is primarily a life insurance product. However, unlike other life insurance policies, it offers more than just a life cover. It also provides the policyholder with a chance to invest in the market or low-risk options and earn appropriate returns. A large number of people find a ULIP to be a beneficial product due to its dual benefits. They can meet their insurance and investment needs without having to buy and manage two separate products.
When you buy a ULIP policy, you are expected to pay a premium regularly. However, if you wish to, you can also opt to pay an additional premium. This can greatly increase the ULIP returns you will receive in 10 years, or even more if you wish to hold for a longer period. Let’s learn more about the concept of additional premiums in this article.
How do regular premiums in ULIPs work?
Before we learn about additional premiums, let’s understand how ULIP premiums work in general. Your regular premium towards the ULIP policy is divided by the insurance company into two aspects: the life cover amount and investment in financial instruments. You can choose whether you wish to invest in equity funds, debt funds, or a combination of both, as per your risk tolerance. Note that ULIPs allow you to switch from one asset class to another depending on your understanding of the market performance.
You can also use a ULIP plan calculator to make your premium budget planning princess easier.
Features of additional premiums in ULIPs
- No effect on the sum assured if top-up under a certain limit
Some people may think that because they are paying a top-up premium, they would be seeing an increase in the sum assured amount as well. However, the top-up premium does not affect the pre-decided sum assured amount unless it is more than 25% of all the premiums paid until then. The top-up premium will be used for investment purposes solely, once the charges have been deducted.
Hence, if you wish to increase the sum assured amount for better protection for your family, you can opt for an additional premium that is above the given limit.
- Sum assured benefit according to age
If you do decide to add to your sum assured amount, then the increase will be as per your age when you make the top-up premium and not as per your age when you bought the plan. So, if you bought a ULIP plan at age 30 and are paying an additional premium at age 45, the increase in sum assured will be according to the age 45 mark. As age increases, one has to pay a relatively larger amount for a sum assured figure.
- Nominal charges incurred
When you pay an additional premium, it has to be adjusted by the insurer within their larger plan of investment. To compensate for this, some charges might be involved, such as the premium allocation charges and mortality charges. This is no cause for worry as these charges tend to be very nominal, limited to around 3-5% of the amount.
It is also to be noted that these charges are also levied as per your age when you make the additional premium payment.
- Restrictions on payment of additional premiums
If you want to enjoy good ULIP returns in 10 years with the help of an additional premium, then you must make the regular premium payments on time as well. Otherwise, you may not be allowed to opt for the additional premium facility. Another restriction a lot of insurers may have is that one cannot make an additional premium in the last five years of the policy.
You should opt for an additional premium in your ULIPs if…
- The past performance of the ULIP is good
This indicates, to a certain extent, that your ULIP funds are doing well. Making an additional premium payment can help lead to even better returns.
- You have received a particularly good bonus
Rather than spending a bonus on unnecessary expenses, it would be a better idea to invest it toward your ULIP funds.
- You have a good hunch about the markets
If you are of a firm belief that the markets are going to experience a stable amount of growth in the coming years and wish to profit from it, you can do so by making an additional premium payment.
Ensure to use tools such as the ULIP plan calculator and read the terms and conditions of the policy before signing.