Loyalty Additions: What Are They And How Do They Work In A ULIP?

By | January 4, 2019

Do you know the benefits of a loyalty addition program? Here’s everything you need to know about loyalty additions and how they work in a ULIP.

With the rapidly intensifying market for Unit Linked Insurance Plans (ULIPs), insurance providers are constantly striving to offer customers unique benefits and policy features. These products are directed at attracting potential customers and increasing the customer base. Loyalty additions comprise one such unique policy feature.

On one hand a loyalty program provides customers with a reason to stick around and keep purchasing. On the other hand, it provides data/information to allow businesses to access customer needs and to continue to meet their needs and desires.

First things first – let’s understand what a ULIP is. It stands for Unit Linked Insurance Plans. ULIP is an investment cover that offers a mix of insurance along with investment. The goal is to ensure wealth creation along with providing life cover.

Here, the policyholder can pay a premium either monthly or annually. A small portion of the premium goes into securing Life Insurance, while the rest is invested just as is done in a Mutual Fund.

Additional Reading: What Are ULIPs? Should You Invest In Them?

This brings us to our next question. What is a loyalty addition?

To put it simply, a loyalty addition is an extra sum of money offered by your insurance provider for the continuous use of their services. The sum is added to your existing investment corpus.

You can think of loyalty additions as a reward for not quitting your ULIP policy or discontinuing it midway.

Additional Reading: Can A ULIP Help You Meet Your Long-Term Goals?

Loyalty additions act as an incentive to keep the policy holder focused and invested in the program while at the same time encouraging him to pay premiums on time.

In most cases, insurance providers offer loyalty additions in the later period of the policy. While some insurance providers offer loyalty additions upon the completion of the lock-in period of 5 years, certain others provide this benefit after the policy maturity.

Investors look forward to receiving loyalty additions at the time of maturity. This acts as an effective strategy for insurance providers to retain them until the completion of the policy term.

Additional Reading: The Repercussions of Surrendering Your ULIP Mid-way

If you are confused about how loyalty additions in a ULIP work, fret not! We are here to break it down for you. Read on for more information.

There are two ways in which loyalty additions may be applied in a ULIP insurance scheme. It can either be added as a percentage of the fund value or as a percentage of the premium amount.

Take a look at this example for a better understanding. Let’s assume that you are paying an annual premium of Rs. 2 lakhs towards your ULIP plan. As a reward for keeping the policy going for a long-term, say six years, your insurance provider offers a return of 3% of the premium amount. Therefore, an amount of Rs. 6,000 (3% of Rs. 2 lakhs) will be added to your investment corpus.

Additional Reading: All You Need To Know About The Types Of ULIPs

It is crucial to note that the performance of the investment cum insurance portfolio does not determine the amount of loyalty addition you will receive. As elaborated in the example above, it is merely a pre-determined percentage set by the insurer, and the performance of your funds has no bearing on it.

The insurance provider merely fixes the amount based on various factors such as the duration and term of premium payment, premium amount, the term of the policy, and intervals of the guaranteed loyalty additions.

Additional Reading: ULIPs vs Mutual Funds – What Should You Pick?

Here’s another aspect you should bear in mind. Loyalty additions offered during the later period of the policy are higher than those offered during the early months. For instance, initially, for the first five years of the policy you may receive a guaranteed loyalty addition of 1% on the premium amount.

Over time, the insurer may boost this percentage, offering up to 3% from the sixth year to the tenth year. Beyond 10 years of keeping the policy in force, a 5% loyalty addition is guaranteed to the policy holder.

Additional Reading: Gifting Ideas: A Single ULIP Over a Bouquet of Tulips

Many of us tend to overlook important parameters such as the cost of the insurance scheme or ULIP returns. Though the concept of loyalty addition may seem profitable, it should not be the sole determinant of how rewarding a ULIP policy is.

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