What is ULIP? Unit Linked Insurance Plan EXPLAINED

Unit Linked Insurance Plan

ULIP or Unit Linked Insurance plan is a product with dual benefits – Insurance and Investments. The premiums paid by you is partially invested in markets to provide you decent returns and remaining portion is reserved for insurance benefits in the form of sum assured. You have the option to select the type of mutual fund based on your risk appetite such as equities, bonds or other securities.

Let us understand more about Unit Linked Insurance plan in detail.

What is Unit Linked Insurance Plan (ULIP)?

  • Full form of ULIP is Unit Linked Insurance Plan( ULIP)
  • A Unit linked insurance plan is a insurance plan which offers two benefits of investment – investing in equities or bonds to fulfil policy holder’s long-term goals and life cover to financially protect his / her family in case of an unfortunate event
  • This product requires policyholders to make regular premium payments
  • The premium paid towards a ULIP is divided into two parts – Part of the premiums gets invested in insurance coverage, while the remaining portion is invested in either equities, bonds, or a combination of both.
  • Policy holder can choose to invest in either equity, debt, or a combination of both funds as per his/her risk appetite and goals
  • This makes ULIPs an ideal investment option for policyholder and his/her family’s long-term goals
  • Unit Linked Insurance Plans help investor to serve two goals in a single product: investment and insurance

ALSO READ: 4 Types of Life Insurance Plan in India

How Unit Linked Insurance Plan works?

  • ULIPS are products that provide you with a combination of a life insurance policy and also an investment opportunity through a mutual fund in a single plan
  • A portion of your premium is diverted towards the investments, which is the mutual fund portion: equity, debt, hybrid, or as the case may be.
  • There are fund managers who look after your investments
  • You are also allowed to switch between different types of funds to make the best ULIP plan for yourself
  • ULIP insurance plan comes with a lock-in period of five years. However, ULIP being a combination of a life insurance policy and a mutual fund, both of which are long-term investments, should be held for 15 years or more.
  • ULIPs are a category of life insurance plans which provide benefit of growth of policyholders money along with a life cover
  • Fund manager do this by investing a part of your premium towards a life cover, and the rest in funds of your choice
  • Most ULIPs give you the option to choose from multiple equity and debt funds
  • Policyholder can also invest in a mix of both types of funds as per his/her risk appetite. The returns from your plan will depend on the performance of the fund chosen by you.
  • To grow into the capital market with ULIPs, policy holder have to decide the level of life cover he / she required, premium amount, premium payment option and policy term to match his / her financial protection and savings needs
  • Policyholder can also select the premium payment frequency as monthly, half-yearly, or yearly basis his/ her convenience and can also opt to pay premium in various options like lump sum payment, and recurring payments on an annual, half-yearly, or monthly basis.
  • Investment in Equities place money into stocks, Debt funds in bonds, government securities, and other low-risk investment tools.
  • The money invested in these funds defines the value of your policy. The longer you stay invested, the better your chances of getting higher returns.
  • In case of an unfortunate incident during the policy tenure, your nominee will receive the sum assured to cover the remaining liabilities and fulfill their dreams
  • In a Unit Linked Insurance Plan (ULIP), the premiums which an investor gets invested in the funds chosen by him/ her after deducting allocation charges and charges including those for managing funds policy administration and for providing insurance cover are deducted from the funds by cancelling certain units
  • The value of each unit of a fund is determined by dividing the total value of the fund’s investments by the total number of units.

ALSO READ: SIP Returns Calculation using Formula in Excel

Benefits of Unit Linked Insurance Plan

There are multiple Benefits of ULIPs mentioned below:

  1. Flexibility to choose fund : ULIP come with a range of equity, debt and balanced fund options to choose from. As a result, policyholder can invest his / her money as per the risk appetite and return expectations. ULIP also gives opportunity to move money between different funds in order to help policy holder earn maximum returns.
  2. Benefit Illustration: As a customer, it is your right to ask for a sales benefit illustration. A benefit illustration helps investor to understand premium usage and policy charges. It also highlights important information about the possible returns on the basis of the chosen Sum Assured and premium.
  3. Liquidity: in any unforeseen events ULIP plan allow to do partial withdrawal . After first 5 years investor can also withdraw fully funds from ULIP.
  4. Tax benefits: The premium paid towards the ULIP are exempted under Section 80c of income tax act 1961. Hence it helps investors to save income tax. Also, the returns policy holder receive on the plan’s maturity are exempted from taxes under Section 10(10D) of the Income Tax Act.
  5. Life cover: The primary benefit of purchasing a ULIP is the life insurance cover. In today’s world, the insurance policy acts as a financial safety tool for your loved ones.

ALSO READ: Life Term Insurance Plan Types and Benefits

Is ULIP a good Investment?

ULIP is one of the best product for insurance and investment combinations and below are some of the important points about ULIP as a good investment:

  • When you invest in a ULIP, a portion of your premium is allocated towards life insurance coverage, while the remaining amount is invested in various market-linked funds such as equity, debt, or balanced funds.
  • This dual nature of ULIP makes them an effective tool for wealth creation and protection simultaneously.
  • The longer you invest in a ULIP plan, the higher your returns would be based on market performance.
  • This is because ULIP uses the power of compounding to increase the net worth of your fund.
  • Investing in ULIP also provide significant tax advantages. Under Section 80C of the Income Tax Act, the premiums paid towards ULIP are eligible for tax deductions, up to a certain limit.
  • Moreover, the maturity proceeds and death benefits received from ULIP are usually tax-free. This makes ULIP a tax-efficient investment option for individuals seeking to minimize their tax liabilities

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ULIP vs Term Insurance Difference

Below are the differences between ULIP and Term Life Insurance Plans:

ULIP (Unit Linked Insurance Plan)Term Life Insurance
Insurance Plan with Investment OpportunityPure Insurance Plan
Returns depend on Market PerformanceNo Market Returns, only used for Insurance
Death and Maturity BenefitsOnly Death Benefits
Premiums are high due to investmentsPremiums are low since pure insurance plan
Sum assured on death is low, since premiums are divided into insurance and investmentsSum assured on death is high since premiums are only used for pure insurance purpose
Many charges involvedNo charges involved
Lock in period of at least 3 to 5 Years for partial withdrawalNo lock in period since no withdrawals allowed
ULIP have some risk since part of premiums are invested in marketsNo risk since no investments are done in Term Life Insurance
Maturity Benefits by withdrawing the units of mutual funds in which investments are madeNo Maturity Benefit but return of premiums paid is allowed which is a type of life term insurance with little high premium
Tax Benefits allowed in Section 80C and Section 10(10D)Tax Benefits allowed in Section 80C
ULIP vs Term Life Insurance Plans

ALSO READ: Why Term Life Insurance Plan is Better?

Is ULIP better than FD?

  • Investors must choose between a ULIP or a fixed deposit (FD) plan depending on his/ her financial goals.
  • While ULIP are a type of investment option that combines life insurance with investment , on the other side FDs are only investments
  • The main difference between the two relate to the wealth creation – The returns on ULIP investments in stock and debt instruments are not fixed and are subject to fluctuations. Market circumstances and fund performance both affect returns.
  • FD, in contrast, provide fixed returns that are independent of the state of the market.
  • Because ULIP invest in stock and debt instruments, which are prone to market fluctuations, they have a certain amount of risk. Policy holder can also lose deposited capital with a ULIP.
  • FD, on the other hand, offer fixed returns, making them lower-risk investments.
  • After the lock-in period, partial withdrawals are possible with ULIP, though there may be fees associated with the withdrawal amount. On the other hand, FDs also permit partial withdrawals without any penalties case to case basis.

So to summarize, for your short term goals you should choose Fixed Deposits and for your long term goals, choose ULIP

Is ULIP risk free?

ULIP are generally considered a risky instrument due to the in-built investment component. In Unit Linked Insurance Plans (ULIP), the investments made by policy holder are subject to risks associated with the markets. This investment risk in portfolio is borne by the policy holder.

Thus, he / she should always make investment choice only after considering his/ her risk appetite and needs. The overall risk associated with ULIP, however, doesn’t depend on a single type of fund options. Instead, it is a combination of the risk profile of the fund options that you choose to invest in.

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ULIP is one of the good products if you want investments and insurance in same product. It is important to note that the returns on investments are subject to market risk and market performance and is not guaranteed. But historically, we have seen that market performs better over long term of 10 to 15 years.

At the same time, the policy holder gets the insurance benefits as well in the form of sum assured to the family in case of any uncertain incidents. This sum assured can help the family members to cover the remaining liabilities and living expenses as well for few years.

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