Should You Opt for ULIP with Minimum Sum Assured?

The sum assured is the guaranteed amount that the insurer will pay in case the policyholder passes away during the term.

In this article, we will explain if you should opt for a ULIP with the minimum sum assured.

A Unit Linked Insurance Plan (ULIP) is a unique insurance plan that allows a person to invest in different investment instruments and life cover. With the help of a ULIP, an investor can purchase life cover and invest his/her money in different securities like equity funds, debt funds, etc. A part of the ULIP premium goes for investment instruments. The other part goes for life cover. However, what will happen if a person opts for a ULIP with the minimum sum assured?

As per the IRDAI, people below 45 years of age are allowed to opt for a ULIP with a lesser sum assured than 10 times of premium. Previously, the minimum was 10 times. The minimum sum assured is reduced to 7 times of the premium paid.

If a person opts for a minimum sum assured, then his/her insurance cover reduces. However, the investment amount increases. Therefore, the policyholder can earn higher returns on the premiums. But a person who chooses 10 times lesser sum assured than the premium can’t get tax benefits. Is it wise to purchase a ULIP with the minimum sum assured?

In case a person opts for a higher sum assured, the part of the premium that goes for life cover will also increase. However, by opting for a lower sum assured, he/she can increase the investment amount and can earn significant returns. As per the IRDAI regulations, the minimum assured for people below 45 years of age is reduced to 7 times of the premium paid for a ULIP plan. Previously, people above 45 years of age were eligible for this facility. People who opt for the minimum sum assured can get more returns as the investment amount increases.

The sum assured is the guaranteed amount that the insurer will have to pay if the policyholder dies during the tenure. There are two situations when the insurance company must pay a higher amount than the minimum sum assured. If the investment corpus is higher than the minimum sum assured and total premiums paid, then the insurance company must pay the fund value as on that day. Also, The insurer must pay 105% of the premiums paid in case the total premium paid for the number of years is more than the sum assured for that period of time.

The amount paid in case of the policyholder’s death during the term is tax-exempt. The amount is also exempted from tax if the person opts for a ULIP with a sum assured less than 10 times of the premium paid.

A policyholder needs to keep in mind that the sum assured amount can’t be changed after the policy is purchased. Once a person purchases a policy, he/she can’t change the sum assured or premium. However, in the investment part, the policyholder can switch between the funds.

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