What Is ULIP? - Learn the A to Z of ULIP Plans

What Is ULIP?

Unit Linked Insurance Plan or ULIP is a type of Life Insurance policy, which offers you dual benefits of investment and insurance. ULIP offers you an opportunity for wealth creation along with the protection of a life cover. In ULIPs, you invest your money in the financial instruments (equity, debt, or a combination of both). The returns on the investment depend upon the performance of the funds selected by you.

Getting Started with Unit Linked Insurance Plan

It doesn't matter if your age is 20, 35 or 50. Whatever your age, you are sure to have certain life goals and dreams that you hope to fulfil. You may want to start your own business, or perhaps you want to make a down payment on your dream home. Whatever be the reason, to be able to fund your life goals you need corpus. You can use an investment plan such as a Unit Linked Insurance Plan, or ULIP, to help you save up the money required.

Unit Linked Insurance Plans offer a combination of investment opportunities and life insurance. ULIPs are generally considered to be one of the most sought-after insurance offerings.

How Does ULIPs Work?

Although an insurance offering, a ULIP plan also works as a goal-based investment opportunity that has been designed to help you meet your financial goals. Before you invest in one of these plans, you need to understand where your money will be invested.

As with any insurance policy, you will be required to pay a premium for your Unit Linked Insurance Plan. Your premiums paid will be invested in funds as opted by you. If you have a high risk appetite, you can choose to invest in equity funds. On the other hand, if you aren't willing to take too much of a risk, you can put your money in a debt fund. To enjoy the benefits of returns without high risks, people also prefer investing in a combination of both equity and debt funds. Since the investments are made to help you meet your financial goals, you can choose in what kind of funds your money should be invested in.

Insurance companies allow you to switch between funds from time to time as per the terms and conditions specified therein. There is no tax implication on the same and you can decide to switch based on the market movement and investment goals. For example, if a particular fund is underperforming, you may switch to the one that has delivered a better performance. You can also switch from one asset class to another based on your changing life goals. For instance, when you are young at the start of your career, and have lesser responsibilities you can opt for higher risks and invest in equity funds. However, as you move closer to your retirement age, you may opt for debt as they have a low risk.

Fund Options Under ULIPs

1. Equity Funds

Your premium is primarily invested in equity markets and therefore a high-risk investment option. These funds offer higher returns.

2. Fixed Income Funds

A major proportion of your premium is invested in debt instruments such as government securities, fixed income bonds etc. This is a medium-risk investment. These funds offer low to medium returns on investment.

3. Liquid Funds

A major proportion of your premium goes into liquid investment options such as cash equivalent securities, money market instruments etc. These funds come with a low risk and offer low returns as well.

Benefits of Investing in ULIPs

1. Dual Benefit of Investment and Insurance

ULIPs not only provides you a life insurance cover but provides an opportunity of wealth creation as well. With ULIPs you can earn market linked returns. Because of this dual benefit, ULIPs act as a comprehensive financial product.

2. You can choose your investment option

Based on your risk appetite, you can invest your money in-

• High risk takers can invest in equity funds
• Moderate risk takers can invest as balanced approach
• Low risk takers can invest in debt funds

An investor can switch his funds based on the market outlook.

3. You can achieve Life Goals

ULIPs are a good option for long term investment such as buying a new house, children’s higher education, retirement planning and so on. ULIPs can act as a tool to create wealth for the future.

4. ULIPs offer Tax Benefits

Premiums paid towards a ULIP policy is eligible for a tax deduction under section 80C maximum up to Rs 1, 50,000. The returns out of the policy are also eligible for maturity benefit from income tax subject to satisfaction of conditions mentioned under Section 10(10D) of the Income-tax Act.

Note that for ULIP policies issued on or after 1st February, 2021 with annualised premium more than Rs. 2.5 lakh will not be exempt under Section 10(10D) of Income Tax Act and any gain from such high value ulip policy will be taxed as a capital gain under Income Tax Act.

5. ULIPs offer flexibility in investments

ULIP plans are a flexible investment option. It offers flexibility to-

• Switch between investment funds based on market outlook
• Make partial withdrawals
• Do a top up to invest additional sum of money
• Do a premium redirection as per the change of financial goals

Who Should Invest in ULIP Policy?

People with Varying Risk Appetite

ULIPs offer different fund options as per the risk appetite of the individual. There is a choice of funds for all types of individuals- from high risk takers to risk-averse individuals that can help achieve their life goals.

People who Want to Closely Monitor their Investments

A Unit Linked Insurance Plan allows you to closely monitor your investment portfolio. ULIPs also allow you to switch your funds to re-adjust the capital allocation with varying risk profiles

People with Medium to Long Term Investment Horizon

ULIP is an ideal investment option for you if you are ready to stay invested for a relatively longer period.

Investors across all Stages of Life

ULIPs offer different plans which can be selected by an investor depending upon the life stage he is currently in. ULIPs can protect your family against financial liabilities at that point in time depending on your life goal.

Are ULIPs Good for Me?

Before you decide whether or not you want to invest in this insurance product, there are a few things you need to think about:

1. Why Are You Investing?

ULIPs have been designed to help you meet your financial goals. So, before you invest in a goal-oriented plan, make sure you outline your financial goals and identify the plan that will help you achieve your life goals.

2. What Kind of Charges Do I Need to Pay?

Since ULIPs offer individuals both insurance and investment, there are charges that come with investing in such a plan. Before you decide to put your money into a ULIP, make sure you educate yourself on the kind of charges that each insurance provider levies on their ULIPs.

3. How Do I Decide My Insurance Cover?

It's important to remember that along with investment opportunities, ULIPs also offer life cover. They are first and foremost insurance products, so you need to choose adequate life cover for yourself to safeguard your loved one's future. If you opt for the maximum sum assured offered by an insurer as per the terms & conditions of the plan, your family will be provided with adequate financial backing in the event when something happens to you.

Now that you have a better understanding of what is a ULIP plan, you can safely decide how and where you need to invest your money. If you're ready to safeguard your future, browse through different ULIP Plans that suit your needs.

How to Choose the Best ULIP Plan for Yourself?

Given below are some of the points to take into consideration while buying a ULIP plan for yourself-

• Evaluate Your Life Goals
• Choose Adequate Life Insurance Cover Amount
• Opt for a Longer Investment Tenure
• Consider ULIP charges

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