What is a unit linked insurance plan? Why is it called unit linked plan and why is it risky?
Mahesh Kumar, Rohtak
A unit linked insurance plan is a plan that provides both insurance as well as an investment benefit. In unit linked plans, the premiums paid are invested in funds offered by the company and the policyholder determines the appropriate ratio of investments into these funds. The funds are generally invested in equities, debt instruments, money market instruments, and government securities, etc. The value of the policy is determined on any day by multiplying the number of units issued by the value of units on that day. The value of these units is called the Net Asset Value (NAV) and is normally published in newspapers on a daily basis. The NAV is based on the market value of the underlying investments in that fund such as equities, company bonds and government securities.
Unit linked insurance products are risky because the premium money invested on behalf of the policyholder is subject to market risk. The funds do not offer a guaranteed or assured return. Insurance companies will only show you a projected return which may or may not be achieved during the term of the policy; it may give you a higher return or a lower return.