Serving as one of the preferred financial tool for both investment and insurance, ULIPs are one of the most popular investments made in today’s time. Moreover, they offer an array of tax benefits and a flexibility in ULIP investments as per your specific financial goals and priorities. However, most investors are unaware that ULIP plans can also be placed into two distinct categories - Type 1 and Type 2. While both of these categories of ULIPs have their own advantages, it is important to first understand how they operate and how they can specifically benefit your financial goals. Here is a closer look at Type 1 and Type 2 ULIPs, their differences and their pros and cons.
What is ULIP?
Before we delve into the types of ULIPs, let us first review the question of "What is ULIP?" and how it is beneficial for the average investor. A Unit Linked Insurance Plan, or ULIP, is an investment option, which offers the policyholder the dual benefit of investing in either equity funds or debt funds (or both), while providing life insurance coverage. Policyholders pay premiums, a part of which is channelized into market-linked instruments, and the remaining amount is used to provide life insurance cover by the insurance companies.
ULIP plans offer a wide variety of benefits to investors. Firstly, they offer investors immense flexibility in choosing funds as per their specific financial goals. You can invest in high-risk equity funds, medium-risk fixed income funds or even low-risk liquid funds, all managed by professional fund managers. Over time, as your goals and risk appetite changes, you can also switch between your choices of ULIP funds. Apart from this flexibility, ULIPs offer an opportunity for inculcating the habit of disciplined savings, receiving insurance coverage and availing various tax benefits.