You can profit from both investment and insurance benefits through unit-linked insurance plans (ULIPs). A ULIP can increase your wealth while providing you with life insurance coverage. ULIPs are used to invest your money in various market-linked financial instruments (equity funds, debt funds, hybrid funds, or liquid funds). The returns on your investment will depend on how well your selected funds perform. Sometimes, loyalty additions can boost these returns.
Even though they go by several names, such as additional allocation, extra allocation, and fund boosters, loyalty add-ons all have the same functions. So let’s first comprehend how ULIP insurance functions before examining loyalty additions’ role.
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How does a ULIP work?
To help you reach your financial goals, ULIP plans act as both a goal-based investing opportunity and an insurance option. Therefore, understanding where your money will be invested is essential before investing in a ULIP.
Your Unit Linked Insurance Plan will need you to pay a premium like any other insurance policy. The units of the funds you choose will be purchased with the premium payments you make. If you have a strong risk tolerance, you can invest more in equity funds. If you want to avoid taking on too much risk, on the other hand, you can invest your money in a debt fund. A blend of debt and equity funds is another option for investors who want to reap the benefits of returns without taking on too much risk. You can select the funds to be invested in. At the same time, insurance companies will allow periodic fund-switching with certain terms and conditions.
You are free to change your fund strategy according to market movements. This will either help you minimize your risks in bear markets by switching to safer options or scale up your profits in bull markets by shifting more towards equities. You can keep syncing your portfolio with changing market circumstances and your own financial goals.
The insurer pays you the fund value accumulated during the insurance term when the policy matures. An online ULIP calculator can also predict this value before you purchase the plan. It may be distributed as a single payment or in ongoing installments. Some ULIP plans can also be eligible for a loyalty addition. Here’s delving deeper into the same.
How Do Loyalty Additions Work?
Simply put, loyalty addition is an extra sum of money that your insurance provider gives you in exchange for continuing to use their services. The sum is usually a certain percentage of your current portfolio of investments.
Loyalty additions might be a benefit for keeping your ULIP plan active and avoiding early termination. The insured person is encouraged to commit to the program by loyalty additions, which also encourages timely premium payments.
Insurance companies often offer loyalty additions toward the end of the policy term. While some insurance providers pay loyalty bonuses after the 5-year lock-in period has passed, others reserve this benefit for when the policy reaches maturity. Investors eagerly anticipate getting loyalty additions upon maturity. The insurance industry uses this as a successful strategy to retain customers throughout the duration of the policy.
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What Factors Determine Loyalty Additions?
Loyalty additions in ULIP Insurance policies can be calculated in one of two ways: either as a percentage of the fund value or as a proportion of the premium paid.
For clarity, assume you pay a 2 lakh rupee premium annually into your ULIP plan. When you retain your insurance coverage for a long time, say six years, your insurance company rewards you with 3% of the premium. A total of Rs. 6,000, or 3% of Rs. 2 lakhs, will be added to your investment fund.
It is crucial to realize that the loyalty addition you will earn is not based on the portfolio’s performance in terms of investments and insurance. The performance of your assets has no bearing on it; it is just a fixed percentage set by the insurance company, as was previously explained.
The insurance provider determines the sum based on several factors, such as the frequency and duration of premium payments, their size, the policy duration, and the intervals between the guaranteed loyalty increments.
Conclusion: Are Loyalty Upgrades Beneficial to You?
Insurance companies usually start paying loyalty additions after varying durations. In this instance, the insurer determines the loyalty addition by comparing the insurance company’s performance to the guaranteed additions. These supplemental benefits accrue over the policy’s duration and are paid at maturity. Therefore, loyalty addition is only available if you have owned the policy for a set number of years in some cases as well.
Although the concept of a loyalty addition may seem desirable, it shouldn’t be the only criterion utilized to assess a ULIP plan’s value. A policyholder investing in a ULIP must continually assess the more important factors, such as life coverage, fund types, fund performance, and premium amounts.