If you are a first-time insurance buyer, you may feel overwhelmed by the sheer number of options you have in the market. It can be hard to choose the right plan. However, you can narrow down your choice by first assessing your needs. You must ask yourself if you need a life insurance policy that offers both protection and maturity benefits and whether you are looking for a long-term plan? If you answered that YES, investing in ULIP becomes a mandate.
If you were unaware about ULIP full form, it stands for Unit Linked Insurance Plan. It is a mixture of insurance and investment. By paying a single premium, you can get both insurance protection and the opportunity to invest in different assets of your choice and build a corpus for the future. While the insurance component of ULIP has the same features as a standalone policy, it offers additional benefits such as a top-up facility.
What is the top-up facility in ULIP?
To understand the concept of a top-up facility in ULIP and its working, let us take an example of a prepaid mobile number. When you recharge your number, your talk time increases, but it does not increase the time validity. The top-up facility in ULIP works similarly.
Top-up facilities in ULIPs allow you to add an additional amount to your investment on top of your prevailing premium. The additional amount you invest only raises the fund value and not the sum assured of your policy.
You can opt for the top-up facility at any time during the policy period till the total top-up premium amount does not exceed a specific percentage of the regular premium amount. Typically, all insurance companies define the minimum top-up amount in the policy documents, and you can avail of this facility only if you pay the regular premium on time.
Important things to know about using the top-up facility in ULIP
If you wish to purchase a top-up premium, you must hold the policy for at least five years. However, if you surrender your policy, you can withdraw your top-up amount before the lock-in period is over.
Generally, the insurance companies do not allow the ULIP policyholders to buy top-up premiums during the last five years of the policy term unless you hold a Unit Linked Pension Plan. If you hold ULIP, the insurers do not have any restrictions on the number of top-ups you can buy.
Top-ups are an excellent option to enhance your fund value and maximise the returns potential when the market is performing well. However, you must use it wisely. It is better to invest only if the funds in the ULIP show good performance consistently.
One of the most significant benefits of investing in ULIP is that these market-linked instruments are fully transparent. When you get a windfall gain, you can pump it into your existing ULIP, and it will function as a single-premium policy and act as an additional policy to your current plan. Also, you get other benefits like zero administration charges and lesser premium allocation charges.
If you have purchased ULIP and are happy with the returns, you can consider a top-up to boost your investment and further increase your returns potential.