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How Does ULIP Work

How does ULIPs work

How Does ULIP Work


April 17, 2020

By : Bajaj Allianz Life

A Unit Linked Insurance Plan (ULIP) is one of the preferred tax-saving investment options for investors in India. It gives you the benefit of capital appreciation combined with a protective life cover. Effectively, a ULIP is a life insurance plan that offers the advantage of market-linked investments. You can choose which ULIP funds to invest in based on your risk appetite and life goals you want to achieve.

Understanding how a ULIP works can help you get a clearer picture of how to invest in a Unit Linked Insurance Plan. It also helps you plan and comprehend how to go about investing in a ULIP in order to achieve long term objectives i.e. getting your life goals done.

So, here is a closer look at how a ULIP works.


How does ULIP work?


Unit Linked Insurance Plans offers a combination of life insurance and investment opportunities. Here’s a detailed look at how a ULIP works.

• In order to achieve your Life Goal, you can invest in a ULIP by paying a premium amount.

• This premium can be a single, lump sum payment, or periodic payments charged on a monthly, quarterly, semi-annual, or annual basis depending on your choice of preference.

• The other part of your premium is invested in specific funds. The insurer effectively pools together the funds contributed by several policyholders and invests this money in various financial instruments such as equity, debt etc.

• After your money is invested by the life insurance company, the corpus gets divided into units, each of which is assigned a face value.

• Depending on the amount you’ve invested, you are assigned a certain number of units.

• The value of these units at any given point is termed as the Net Asset Value (NAV).

• At the end of the ULIP’s term, you will receive a maturity benefit as per policy terms and conditions.

• The capital gains are calculated as the increase in the ULIP NAV of your units over the course of the policy term.


What are the features of a Unit Linked Insurance Plan?


Looking into the features of this option can help you get to know how a ULIP works and how a ULIP benefits both you and your nominees or legal heirs. Here are some of the defining features of ULIPs.


Fund switching


You can switch the funds you’ve invested in, depending on your changing financial goals or based on the fluctuations in the market. Typically, ULIPs allow for a specific number of free switches each year. The switching facility in a ULIP benefits you by enabling you to take advantage of changing market conditions, so you can maximize your ULIP returns over the long run.


Partial withdrawals


Unlike traditional life insurance plans, ULIPs allow you to partially withdraw your funds after a predetermined lock-in period of 5 policy years. However, an investor can opt to withdraw partially while some plans also offer unlimited withdrawals. The withdrawals can either be free up to a certain limit or are charged based on the transactions subject to terms and conditions mentioned under the product.




In case you receive a windfall and have some surplus funds in hand, you can make use of the top-up feature to enhance your corpus. Top-ups are essentially an increase in the premium you pay towards the ULIP plan. The more you invest, the greater your returns may be in the long run. The top-up feature takes advantage of this principal and allows you to safely invest any surplus cash you may possess in market-linked investment options that could enhance your capital over the course of the investment.


ULIP charges


If you plan on investing in ULIPs, you must be wondering about the additional charges associated with this investment. So, what are the different ULIP charges? Let’s take a look.

• Premium allocation charges levied for allocating your premium to the funds of your choice

• Policy administration charges levied for the general administration and overseeing of your policy

• Fund management charges levied for managing your ULIP funds

• Mortality charges, calculated based on your age, health risks and other factors, levied through cancellation of units for providing you a life cover

• Partial withdrawal charges for withdrawing a portion of your investment after a specified period

• Fund Switching charges imposed for making fund switches beyond the regular number of free switches allowed by your plan


How to maximize your ULIP benefits?


Having understood how a ULIP works, it’s now time to look into how you can maximize your ULIP benefits. If you’ve just invested in a ULIP scheme, or if you plan to invest in one, here are some steps you can take throughout the term of the policy to make the most of your investment.


• Pay attention to how your premium is allocated

The manner in which your premium is allocated between asset classes determines how much your investment grows over the policy term. You need to constantly track how your assets are performing. You also need to ensure that your ULIP portfolio is diversified, so the risk is spread across various classes of assets. This way, you can optimize your asset allocation and maximize your ULIP returns.


• Align your investments with your life goals


Another important step to ensure that you reap your ULIP benefits to the fullest is to align your investments with your life goals. For instance, if you wish to reap optimum returns over the short term in order to save up for the down payment of your home, you could opt for equity-based funds. On the other hand, if you wish to generate retirement savings for your retirement age, which could be 20 years from now, debt funds would be the ideal choice.


• Factor in your risk appetite


Your risk appetite plays a major role in determining how you invest. Since ULIPs offer a variety of investment options, you need to be aware of your risk profile if you want to make the most of your ULIP plan. Over the course of the plan’s tenure, revisit your investment objectives periodically and ensure that your ULIP investment portfolio is in keeping with the level of risk you’re willing to take.


• Stay aware of how the markets are performing


You also need to continuously stay aware of how the financial markets are performing. This research helps you understand which assets are poised to offer higher returns. You can then make use of the ULIP fund switching feature to reap higher market-linked returns on your investment. Remaining updated about the market’s performance also allows you to divest assets that may pose the threat of losses.


• Pay your premiums on time


Another important step that you inculcate as part of your ULIP investment is prompt payment of your premium. Multiple defaults could result in causation of your ULIP policy meaning that you cease to be eligible for all the ULIP benefits offered by the plan. To avoid this costly mistake, ensure that you pay your premium charges on time. By doing so, you can remain invested for the long term.


Now that you know the answer to the question “How does a ULIP work,” you’re in a better position to make an informed decision about this investment. A ULIP plan offers several benefits to policyholders. Here’s a quick look at why you should invest in a Unit Linked Insurance Plan.

• ULIPs allow you to save for the future in a disciplined manner.

• They offer the choice of several funds, so you can invest in alternatives that are in keeping with your life goals.

• You get to take your risk appetite into consideration.

• You can switch funds each policy year to take advantage of market fluctuations.

• The premiums you pay are deductible as per section 80C of the Income Tax Act, 1961, subject to provisions stated therein.

• You can make partial withdrawals in case of any contingencies.

• The benefits received from a ULIP are exempt from tax, subject to provisions of Income Tax Act, 1961.

• ULIPs help you to achieve your Life Goals.

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