What are Loyalty Additions, and How Do They Work in A ULIP?

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What are Loyalty Additions, and How Do They Work in A ULIP?

Unit Linked Insurance Plans (ULIPs) provide you with both investment and insurance benefits. A ULIP gives you the chance to build wealth while still enjoying life insurance protection. You invest your money in financial instruments using ULIPs (equity funds, debt funds, or a combination of both). The performance of the funds you choose will determine your investment’s returns. These returns can sometimes be slightly enhanced with loyalty additions. 

Loyalty additions go by various names, including additional allocation, extra allocation, and fund booster, but they all serve the same purpose. So let us first understand how a ULIP works and then see where Loyalty additions come in. 

Working of a ULIP

A ULIP plan serves as both an insurance option and a goal-based investment opportunity that has been created to assist you in achieving your financial objectives. Before investing in a ULIP, you must comprehend where your money will be invested.

Your Unit Linked Insurance Plan will require you to pay a premium like any other insurance policy. Your premium payments will be invested in the funds of your choice. You may decide to invest in equity funds if you have a high tolerance for risk. On the other hand, you can invest your money in a debt fund if you don’t want to take on too much risk. People also choose to invest in a mix of equity and debt funds to profit from returns without taking on significant risk. You can select the kind of funds in which your money should be placed because the investments are created to assist you in achieving your financial objectives.

Under the terms and circumstances outlined therein, insurance companies permit you to switch between funds occasionally. No tax repercussions are associated with the same, and you are free to switch according to market trends and your investing objectives. 

At maturity, the insurer pays you the fund value accumulated over the policy term. This value can be estimated before buying the plan as well, using an online ULIP Plan Calculator. It can be paid out in a lump sum payment or regular payments. Additionally, some ULIP plans may also qualify for a loyalty addition. 

What are Loyalty Additions?

Simply put, a loyalty addition is an additional amount of money your insurance company provides in return for your continued usage of their services. The amount is included in your current investment portfolio. 

Loyalty additions can be viewed as a reward for maintaining your ULIP plan and not terminating it early. Loyalty additions also motivate the policyholder to commit to the program while pushing him to make timely premium payments.

In the final stages of the policy term, insurance providers frequently give loyalty additions. While some insurance companies give loyalty additions after the 5-year lock-in term is over, some companies only offer this advantage upon the policy’s maturity. At maturity, investors eagerly anticipate receiving loyalty additions. This serves as an efficient tactic for insurance companies to keep them around until the end of the policy term.

How are Loyalty Additions determined?

In a ULIP insurance policy, loyalty additions may be determined in one of two ways- either a percentage of the fund value or a percentage of the premium payment can be added.

For a better understanding, assume you are contributing to your ULIP plan with an annual premium of Rs.2 lakhs. Your insurance company gives 3% of the premium as a reward for maintaining the policy for a lengthy period, say six years. So, 3% of Rs. 2 lakhs, or Rs. 6,000, will be added to your investing corpus.

It is essential to understand that the amount of loyalty addition you will receive is not based on the performance of the investment and insurance portfolio. It is simply a predetermined proportion established by the insurer, as explained in the example above, and the performance of your funds does not influence it.

The insurance company merely sets the amount depending on several variables, including the frequency and length of premium payments, the amount of the premium, the length of the policy, and the intervals of the guaranteed loyalty additions.

Conclusion – Can Loyalty Additions Benefit You?

Typically, from the tenth year on, a public sector insurer offers loyalty additions to policyholders. The insurer uses the difference between the insurance company’s performance and the guaranteed additions to determine the loyalty addition in this case. Over the policy term, these added benefits build up and are paid at maturity. Additionally, you must have owned the policy for at least ten years to be eligible for a loyalty addition. 

Although the loyalty addition idea could sound advantageous, it shouldn’t be the only factor used to gauge how beneficial a ULIP program is. When investing in a ULIP plan, a policyholder must constantly examine the more crucial elements, including cover amount, premiums, fund performance, and claim procedure.

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