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What is perhaps the most important document that should be considered before making a Unit Linked Insurance Plan (ULIP) purchase is also the most overlooked – a benefit illustration.What is a Benefit Illustration. Like the name suggests, a benefit illustration is a document that provides you with an illustrative example of how the ULIP you are considering for purchase would perform over the term of the policy. It, therefore, summarises the costs and benefits associated with the plan. It is mandatory for an insurance company or its licensed intermediary to generate and explain in detail an illustration of the unit linked product being sold to a customer. More importantly, every policy sold needs to have its benefit illustration signed by the customer as part of the proposal form documentation. This guideline was put in place by the Insurance Regulatory and Development Authority (IRDA) to ensure that customers get a detailed understanding of the product, its cost structures and benefits before taking a policy.Why is it important for you to study the benefit illustration. Unit linked plans are life insurance plans that combine protection with investments. These plans charge a premium towards protection (mortality charges) and allocate the balance of the premium paid towards investment by buying units of the fund chosen by the policy holder. These units will be bought at the Net Asset Value (NAV) of the chosen fund; and the value of the policy (the fund value) will be derived by multiplying the number of units accumulated by the current NAV. The charges associated with these plans are typically deducted from the unit balance periodically while the NAV of the underlying fund is market linked. Given the inherent slight complexity in the charging and benefit structure of these plans, a standard benefit illustration acts as a simplified statement of the plan and how it could perform over the term of the policy. The standardised format also makes it easier to compare plans on a like to like basis.How to read a benefit illustration?IRDA has pretty much defined the form and content of a benefit illustration for a unit linked plan. A typical illustration will provide you with a statement almost similar to a yearly cash flow statement. Both the survival benefits as well as the costs associated with a ULIP are dependent on the NAV of the funds you will be invested in, which in turn are market linked. Since NAVs of the units can move up or down depending on the performance of the funds and other factors related to the capital markets, IRDA has stipulated that an illustration always be generated at 2 assumed rates of return – 6% and 10%. The illustration therefore shows you two scenarios – one where the gross returns on the funds (before deduction of any charges) are 10% and another where such returns are 6%. These scenarios give you a broad idea of what you could expect from your funds if the investment performance was around these rates of return.Both scenarios will show in detail the 3 aspects of the policy – 1. Your obligation as a policyholder – the amount of premium you need to pay every year for your chosen policy term and sum assured. It will also clearly show you the premium payment term of the policy. The number of years for which the premium appears in the statement will tell you the number of years for which you need to pay the premiums.2. What would the plan cost you – All charges associated with the plan are shown in the statement. These include mortality, premium allocation charge, administration charge, fund management charge etc. 3. What can you expect from the plan – All benefits associated with the plan are illustrated as part of the statement. These include the death benefit, survival benefit i.e. maturity value and Surrender Value (what would be payable in case you discontinue paying your premiums at any time during the term of the policy). Most plans also offer ‘loyalty additions’ i.e. additions to your unit balance on staying invested in the plan for a certain number of years.The two most important values to keep an eye on are the ‘Fund Value’ and ‘Surrender Value’ at the end of each year. Fund value at the end of each year shows you the expected value of your units post deduction of all charges and assuming the investment return applicable to a given scenario (i.e. 6% or 10%). What is important to note is that this value is not the same as surrender value in the first 5 years of the policy as during this period there are surrender charges that are applicable. Also remember that investments in a unit linked plan are locked for 5 years – even if you surrender a plan during the first 5 years, any surrender value will be paid to you only on completion of 5 years of the policy.The fund values at the end of the each year (post the 5th year) and at the end of the policy term give you a good enough idea of what you might be able to accumulate as savings given the assumed rates of return and post deduction of applicable charges.These values in respective illustration of various plans can help you easily compare your options.Two words of caution!While these statements are fairly informative and should definitely be used to better understand a product and its benefits, at the end of the day they are what they are called – illustrations. Do remember that these are market linked products and these statements are not a contract of insurance or any commitment on the part of the insurer. Do also keep in mind that fund value comparisons only tell you about the pricing competitiveness of products.A product’s fund value might be lower than another simply because of a higher sum assured being offered or additional inbuilt rider/benefit/features associated with the product. Make sure that you consider these factors as well to see which product best suits your requirements and needs when comparing products.