How Does a ULIP Works?

What is a ULIP?

The full form of ULIP is the Unit Linked Insurance Plan. It is an investment plan that provides you with the following triple benefits:

• Life Insurance Coverage

• Investment Options in Market-linked Funds

• Tax Benefits under the Income Tax Act, 1961

A ULIP is a type of life insurance policy that invests a portion of the premium paid in a variety of funds, such as equity, debt, hybrid, or index funds. You can choose the fund allocation based on your risk appetite and financial goals.

How Does a ULIP Works?

You can understand the workings of a ULIP, or Unit Linked Insurance Plan, from the steps mentioned below:

• Premium Payment: You pay regular premiums to the insurance company.

• Premium Allocation: The insurer divides your premium into two parts - one for insurance coverage and the other for investment.

• Multiple Fund Choices: You choose from different funds for the investment portion, such as:

  • Equity funds

  • Debt funds

  • Hybrid funds

  • Index funds, and so on

• ULIP Fund NAV: The performance of your investment depends on the Net Asset Value (NAV) of the chosen fund.

• Insurance Cover: A portion of the premium provides life insurance coverage under which your beneficiary gets a death benefit in your absence.

• Flexibility of Investment: You can switch funds or make partial withdrawals based on your financial goals.

• Charges: ULIPs have various charges, such as fund management fees and mortality charges.

• Returns: The returns you receive depend on the market performance and the chosen fund's performance.

• Tax Benefits: ULIPs offer tax benefits on premiums under Section 80C and on maturity proceeds under Section 10(10D) of the IT Act, 1961.

In essence, ULIPs offer a mix of insurance and investment, giving you the potential for wealth creation while protecting your family's financial future.

What are the Features of a ULIP Plan?

The key features of a Unit Linked Insurance Plan (ULIP) are as follows:

1. Free Fund Switching: 

   ULIP plans offer you a wide range of best investment options, depending on your risk appetite and financial goals. You can switch between funds at any time without having to pay any additional charges.

2. Taxation: 

   ULIPs offer tax benefits under Section 80C and Section 10(10D) of the Income Tax Act 1961. 

   • Premiums paid towards ULIPs are eligible for tax deductions up to Rs. 1.5 lakhs per annum

   • The maturity benefits are tax-free if the annual premium paid is below Rs. 2.5 lakhs.

   • The death benefits are also free of tax.

3. Partial Withdrawals: 

   ULIPs allow you to make partial withdrawals from your investment after a lock-in period of 5 years. This can be helpful in case of emergencies or unforeseen expenses.

4. Life Insurance Coverage: 

   ULIPs provide life insurance coverage to the policyholder. In the event of the policyholder's death, the nominee receives the death benefit, which is typically the sum assured plus the value of the units held in the policy.

5. Lock-in Period: 

   ULIPs have a mandatory lock-in period of 5 years. This aims to promote long-term financial planning.

6. Transparency: 

   A Unit Linked Insurance Plan provides transparency by disclosing the allocation of funds and charges. This helps you to get clarity on your investment.

7. Loyalty Additions: 

   Some of the best ULIP plans offer loyalty additions. This can enhance the value of your policy over time.

8. Maturity Benefit: 

   At the end of the policy term, you receive the fund value with your maturity returns. The maturity amount can be in lump sum or periodic payouts as per your choice.

9. Fund Management: 

   Skilled fund managers handle your investments within ULIPs. They aim to provide you with potential returns by making investment choices backed by analysis and research.

10. Top-ups

    ULIPs allow additional investments (top-ups) over and above regular premiums to enhance investment potential.

11. Rider Options

    You can add riders like the following to enhance the coverage for specific needs of your family:

    • Critical illness rider

    • Accidental death benefit rider

    • Disability benefit rider

    • Child benefit rider

    • Waiver of Premium (WOP) rider

12. ULIP charges

    A ULIP plan has charges like premium allocation, fund management, and policy administration, which impact your returns.

Wrapping It Up

ULIPs (Unit Linked Insurance Plans) are investment-cum-insurance plans that combine the benefits of wealth creation and financial protection. This makes them a versatile financial tool for individuals looking to meet their long-term financial goals. Understanding the underlying investment options and costs associated with ULIPs is crucial in making informed decisions and optimizing their benefits.