Unit-linked plans are essentially similar to mutual fund products wherein the premium is invested in various funds in keeping with policyholders’ risk appetite. However, the difference in a mutual fund investment is that the money is virtually at call by the customer. In case of unit-linked insurance plans, it is impossible to predict whether the market will be in an upswing on the day of the policyholder’s death or on maturity. The Net Asset Value [NAV] will reflect the underlying value of assets, which in turn is dependent on the movement of the Sensex.
In case of death during the premium paying term or the term of the policy, the sum assured or value of policy fund, whichever is higher, is paid to the beneficiaries. In case of survival up to maturity, the value of the fund is paid out. The returns on that day [maturity or death] on the plan depend upon the performance of the market, be it equity or debt. So if the fund value falls below amount invested on that day, the policyholder will receive a lesser amount. Hence one can see that the risk here is transferred to the policyholder as nothing is guaranteed.
These plans give an option to the investor to choose between three fund options – debt, equity, and balanced. In these products, premiums can be paid quarterly, half yearly or yearly. Out of the premium amounts, deductions will be made towards Initial administrative charges Investment management charges [there will be an extra charge if the policyholder utilizes the switch over (from equity to debt or debt to balance) option] Annual administration charges Risk cover and the balance will be invested in a selected fund [debt or equity or balance].