Variable Insurance Product
Also written VIP · Variable Insurance Product (VIP) · Variable Insurance Products
A life insurance policy that credits the investment part of the premium to a policy account earning a defined minimum floor rate plus any index-linked or bonus additions; minimum term 5 years, lock-in 3.
In plain language
A VIP sits between a traditional endowment and a ULIP. Like both, it combines life cover and investment in one premium. Unlike a ULIP, it guarantees a floor.
Each premium is split. One part pays for risk cover. The rest, after expenses, is credited to a policy account that holds everything the policy accrues. Every VIP must define a minimum floor rate of return for that account, and may pay more on top.
That floor is the whole identity of the product in the exam. It is what a ULIP does not have.
How it works
The return has two layers.
| Layer | Source |
|---|---|
| Floor | A minimum rate defined in the policy — always present |
| Additional return | Linked to the performance of an index or benchmark; or bonus in participating policies; or additional interest in non-participating policies |
Structural rules. Minimum policy term five years. Lock-in three years.
Where it sits among investment-linked insurance (Chapter 2, section 2.10.8):
| Product | Payout driver | Guarantee |
|---|---|---|
| Endowment | Sum assured plus accrued bonus | Sum assured; return "quite low" |
| Money back | Percentage of sum assured at intervals | A type of endowment |
| Whole life | Death benefit and cash values | Guaranteed; mainly to create an estate for heirs |
| VIP | Policy account: floor plus additions | Minimum floor rate |
| ULIP | Fund value | None |
A worked example
Two 40-year-olds each pay an annual premium of Rs 1,00,000. In both policies, suppose Rs 10,000 goes to risk cover and expenses, leaving Rs 90,000 to invest. One buys a VIP with a floor of 4 per cent; the other a ULIP in an equity fund. All rates here are illustrative — the workbook gives no floor rate.
Year 1, markets fall 10 per cent and the VIP's index-linked addition is nil:
| VIP | ULIP | |
|---|---|---|
| Invested | Rs 90,000 | Rs 90,000 |
| Return | Floor, 4% | −10% |
| Value at year end | Rs 93,600 | Rs 81,000 |
Year 1, markets rise 15 per cent, and suppose the VIP adds 3 per cent above its floor:
| VIP | ULIP | |
|---|---|---|
| Return | 4% + 3% = 7% | +15% |
| Value at year end | Rs 96,300 | Rs 1,03,500 |
The VIP gave up Rs 7,200 of upside in the good year to avoid Rs 12,600 of damage in the bad one. That is the floor, priced.
Liquidity. Whichever year it is, the VIP buyer cannot exit before the 3-year lock-in ends, and the policy must run at least 5 years.
Why NISM asks about it
Chapter 2, section 2.10.8 (Investment linked Insurance Products), covers VIPs between whole life and ULIPs. Questions test discrimination: which of these products carries a guaranteed minimum floor rate (the VIP), which pays the fund value with no guarantee (the ULIP), which is used mainly to create an estate (whole life). Expect recall of the 5-year minimum term and the 3-year lock-in.
Common exam traps
- The VIP has the floor; the ULIP does not. This swap is the standard trap.
- Minimum term 5 years, lock-in 3 years — two different numbers.
- Additional return can come from three sources: an index or benchmark, bonus (participating), or additional interest (non-participating).
- The investment component is credited after expenses, not the gross premium.
- The policy account holds the accruals; a VIP does not allocate units in funds of the policyholder's choice the way a ULIP does.
- It is not pure insurance. The workbook groups it with products that provide a maturity benefit.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Unit Linked Insurance PlanA life insurance policy in which the premium, after the cost of risk cover and expenses, is invested in equity or debt funds chosen by the policyholder, so the maturity value is the fund value.