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What Are Type I and Type II ULIP Plans

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All About Type I and Type II ULIP Plans
June 09, 2023

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In this policy, the investment risks in the investment portfolio is borne by the policyholder

Every good financial plan includes investments and life insurance coverage. Unit-Linked Insurance Plans (ULIPs) are a unique offering that allows you to invest for the future while enjoying life coverage in the present. These plans let you choose your investment portfolio based on your financial goals and risk appetite. Before you invest, you must understand the various types of plans available and how they can benefit you.

Types of ULIP Plans

There are two types of ULIP plans.

  • Type 1 ULIP Plan

    Type 1 ULIP plans offer a death benefit payout equal to the sum assured or the fund value, whichever is higher. The sum assured is the minimum amount the insurance company pays the nominee in case of the policyholder's demise. Let's assume an individual purchased a ULIP with a sum assured of INR 40 lakhs. During the first year, the fund value is only INR 10 lakhs. If anything happens to the investor, their nominee will receive the sum assured of INR 40 lakhs since it's higher than the fund value. However, 12 years later, the fund value amounts to INR 75 lakhs. If anything happens to the investor now, the nominee will receive INR 75 lakh.

  • Type 2 ULIP Plan

    Type 2 ULIPs offer a death benefit payout equal to the sum assured and the fund value. Since these ULIPs provide a higher payout, investors often pay a higher premium.

Difference Between Type 1 and Type 2 ULIP Plans

The primary difference between Type 1 and Type 2 ULIP plans is the death benefit payout. In Type 1 ULIP plans, the death benefit payout is the higher of the sum assured and the fund value. In Type 2 ULIP plans, the death benefit amount is the sum assured plus the fund value.

Another difference between Type 1 and Type 2 ULIP plans is the sum-at-risk, which is the difference between the total amount invested and the amount the insurance company would pay for a claim. In Type 1 ULIP plans, the sum-at-risk decreases over time as the fund value increases. The lower sum-at-risk translates to lower premiums for the investor. In Type 2 ULIPs, the sum-at-risk remains the same through the policy term, so insurance companies often charge a higher premium.

Which ULIP Plan Should You Choose?

The choice between Type 1 and Type 2 ULIP plans depends on your risk appetite and financial goals. Let us understand this in detail.

Type 1 ULIP plans suit investors who want a guaranteed death benefit payout. These plans work for risk-averse investors who do not want to take any chances with their investments. Type 1 ULIP plans offer lower returns than Type 2 ULIP plans, but provide a guaranteed death benefit payout.

Type 2 ULIP plans are suitable for investors who want higher returns. These plans work for risk-taking investors who are comfortable with market volatility. Type 2 ULIP plans offer higher returns than Type 1 ULIP plans.

Before choosing between Type 1 and Type 2 ULIP plans, consider your risk appetite, financial goals, and investment horizon. You should also evaluate the charges associated with the plan, such as premium allocation charges, policy administration charges, and fund management charges.

ULIPs can be a suitable investment option for individuals looking to meet their long-term financial goals while availing of life insurance coverage. However, it is essential to consider the associated fees carefully before investing in a ULIP. You can select between a Type 1 and Type 2 ULIP based on your investment goals and risk appetite. Always read the policy documents before investing to understand the terms and make an informed decision.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimer

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

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