Top up premium in ULIP [Unit Linked Insurance Plan] is the amount that a policy owner invests in a ULIP over and above the regular premium. The primary aim is to enjoy the benefit of lower Premium Allocation Charge (PAC) which may be as low as 1% as compared with those levied on the regular premium which currently is as high as 25% in the 1st year and reduces to 3-5% subsequently. However, PAC will have an upper cap of 4% from September 1, 2010 as per the new guidelines issued by IRDA (Indian Regulatory and Development Authority) on June 28, 2010.

This advantage comes from the fact that top ups may be made any time unlike regular premiums which have to be paid at fixed intervals. For example, the recent recession, when the markets had fallen nearly 70 percent, was a good time to invest in the stock market and anybody sitting on a surplus could do so through top ups.

Top ups also enjoy tax benefits under section 80 C of the Income Tax Act giving exemption up to a maximum of Rs. 100,000 p.a. invested in life insurance policies. This is another allure of top ups.

However, the total sum of top up investment is usually permissible till 25% of the regular premium paid up to the time of investing. The minimum amount required may vary for each insurance company, but is generally Rs 2000. Also, most insurance companies allow the option of top ups only after a few payments of the regular premium have been made and no payments are pending or have been defaulted.

Under current practices the entire top up money is used for investment purpose without any part allocation towards mortality cover, but this is set to change as per new IRDA guidelines. Top up premiums will lose some of their sheen after the new directives on insurance policy by IRDA come into force from Sept. 1, 2010. All top up premiums will be treated as single premium having a minimum insurance cover of 1.25 times for policy holders below the age of 45 years and 1.1 times for those above 45 years except for pension plan/ annuity products.

Another change is that the lock in period on ULIP as well as top ups has been increased to 5 years from the current lock in of 3 years. This limitation is beneficial to the insured because it prevents withdrawal of funds too early which diminishes the benefit of compounding. On the other hand this limitation can be a constraint in case of pressing requirements. When a life insurance policy holder has surplus cash, investing that money through top up premium is a good idea to reap the benefits of long term investment at comparatively lower charges. The biggest advantage of top-ups is that one can deploy those funds in the market at the time one feels will be most profitable.

So far top up premiums have been a great selling point for ULIPs. With the introduction of new guidelines, the insurance sector will become more transparent and accountable to the insured, which in effect will encourage more people to opt for ULIP products.

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For financial investment planning most people prefer ULIP plans and the ULIP plans are better because it combines regular insurance policy with child education, pension plan & other benefits.