With numerous players offering Unit Linked Insurance Plans (ULIPs), insurance providers constantly strive to offer customers unique benefits and policy features. These product offerings help attract potential customers and increase customer base. One such unique policy feature is loyalty additions.
What is a Loyalty Addition?
Simply put, loyalty addition refers to an extra amount offered by the insurance provider for continuing to patronize them. It adds an extra sum to your existing investment corpus. You may understand loyalty addition as a reward for not surrendering your policy or discontinuing midway.
The main goal of offering this benefit is to encourage you to make timely payments of your premium, thereby helping you stay invested throughout the policy term. This is the main reason why loyalty additions are generally offered in the later period of the policy. In some cases, however, insurance providers offer loyalty addition upon the completion of the lock-in period, while some provide this at the time of policy maturity. Investors receiving loyalty addition at the time of maturity look forward to it and hence this acts as an effective strategy to retain them until the completion of the term.
How does it work in a ULIP plan?
In a ULIP insurance scheme, loyalty addition may be applied in two ways – as a percentage of the fund value or as a percentage of the premium amount. You may understand the latter with the help of an example. For instance, assume that you are paying an annual premium of INR 1 lakh towards your ULIP plan. As a benefit for keeping the policy in force for a long-term, say five years, your insurance provider offers a return booster of 3 percent of the premium amount. This means that an amount of INR 3,000 (3% of INR 1 lakh) will be added to your investment corpus.
It is important to note that the performance of the underlying portfolio does not determine the amount of loyalty addition that you will receive. As seen in the aforementioned example, it is merely a pre-determined percentage set by the insurer and has little to do with the performance of your funds. The insurance provider sets the amount based on various factors such as premium payment term, policy term, premium amount, and the intervals of the guaranteed additions.
Another aspect to keep in mind is the extent of reward offering. Loyalty additions offered in the later period is higher than the early term. For instance, you may receive a guaranteed addition of 1 percent on the premium amount for the first five years of the policy. With time, the insurer may boost the loyalty offering to 3 percent from the sixth year to the tenth year, 5 percent after that, and so on.
Though the concept of loyalty addition may seem lucrative, it should not be the sole determinant of how good a ULIP policy is. You must always look for other important parameters such as the cost of the insurance scheme, ULIP returns, and sum assured amount. It is also necessary to consider the various fund options made available by the insurer. These fund options determine where your money will be invested. You may also conduct a research on the claim settlement procedure. Ensure that the insurer has a simple and hassle-free claim process. By doing so, you may save your beneficiary the trouble of a lengthy and complicated claim settlement process in case of an unfortunate death.
Other benefits of a ULIP policy
You may avail of the benefit of loyalty addition along with other attractive features of a ULIP scheme such as fund switch option and liquidity after the lock-in period. This type of insurance policy offers high value through a host of ULIP benefits, four of which are mentioned below.
- Higher returns
Since ULIPs allow you to invest in the equity market, you may reap great returns. Given the recent past performance of equity funds, this financial vehicle is indeed an attractive financial avenue.
- Life cover
A ULIP policy also offers protection during the policy term. In an untimely death, your loved ones will receive the sum assured amount or the market value of the fund at the time, whichever is higher. Your family may use this amount as an income replacement, especially if you were the breadwinner of the family. They may easily meet their obligations and life goals without any hassles.
- Tax benefits
Another great advantage of a ULIP scheme is its ability to provide tax benefits. You may lower your taxable income to an extent of the premium amount. Section 80C allows a deduction up to a maximum limit of INR 1.5 lakh. You may also note that the amount received at maturity, death, or surrender is tax-free under Section 10(10D).
- Wealth creation
Most ULIP insurance plans are purchased with a long-term objective. Through systematic savings, you build a corpus over a period of time. This aids in wealth creation and helps you build a strong financial future. Additionally, you may use the funds to meet your goals at various life stages such as a wedding, higher education, building a new home, investing in a business venture, or retirement, among others.
ULIPs are a great addition to your financial portfolio due to the aforementioned benefits. Therefore, you may invest in one at the earliest and enjoy all that it has to offer.
