Type 1 and Type 2 ULIPs Explained

ULIPs are a very rich investment opportunity to explore. Different types of ULIP plans are variants of the base concept of ULIPs. Hence, before you look into different types of ULIPs, you should know exactly what a ULIP plan are and how they benefit you. ULIPs or unit-linked insurance plans are a mixture between life insurance and investment opportunity. As a base function, it offers life coverage to the policyholder’s beneficiaries in the case of his/her death. At the same time, the plan allows you to put money into equity funds, debt funds, or both. Just like other life insurance products, policyholders have to pay a premium.

One of the biggest advantages that ULIPs offer is that they simplify both insurance and investment for you. Usually, you would have to put separate funds aside for insurance and investment respectively. This means that you would need to have a high income, to begin with. Moreover, you would need to manage both financial aspects, which can be extremely challenging. ULIPs make sure that your financial goals can be achieved in a systematic and stress-free manner.

Types of ULIPs

Due to their many advantages, ULIPs have gained immense popularity as an investment tool. But many investors that wish to put money into ULIPs are unaware of the fine details about the product. One of these details is that the difference between the two categories of ULIP plans available. These categories being Type 1 and Type 2 plans. Here is a short brief for you to understand the difference between the two.

  • Type 1

In case the policyholder dies, the insurance provider will offer one of two types of benefits to the family. As per a Type 1 ULIP plan, the beneficiaries will receive either the sum assured mentioned in the policy or the ULIP plan’s fund value. The obvious question that arises here is that how the choice is made between the two-payout options. In a Type 1 ULIP plan, the payout option offered to the family of the insured is the one that is higher in monetary value among the two.

For example, you have made regular premium payments for your Type 1 ULIP plan and have ₹ 75 lakhs as the sum assured in the policy. At the same time, your investment fund has been steadily growing. In case of your death, if the investment fund has grown to ₹ 50 lakhs, the investment fund and the sum assured will be compared. In this case, the sum assured would be higher than the investment fund. Hence, your family’s payout will be ₹ 75 lakhs. On the other hand, if your investment fund grew to ₹ 80 lakhs, that would be the payout for your family.

  • Type 2

Compared to the Type 1 ULIP plan, a Type 2 policy is much simpler. In the event of an unfortunate death of the policyholder, the benefit to the family is simple. The plan will have a sum assured set by the policyholder. At the time of the claim, the sum assured will be given to the family of the policyholder. Hence, there is no confusion about the death benefit in case of a Type 2 ULIP plan.

If you take the same example as above for a Type 2 plan, assume that your plan has the sum assured of ₹ 75 lakhs. In this case, your family’s payout will be ₹ 75 lakhs. There is no other option or factor to be considered related to how much the payout should be.

If you are keen on getting a ULIP plan and want to know its premium, it can be done with the help of ULIP calculators available online.

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