What is ULIP? - Unit Linked Insurance Plan | ULIP Meaning

ULIP full form is Unit Linked Insurance Plans.    

ULIP plan is a life insurance product that offers insurance coverage to the insured along with the benefit of investment returns. In ULIP plan a part of the premium is used to provide insurance coverage to the insured’s family, whereas the other half of premium amount is invested in market-linked securities as chosen by the insured like equity, debt and money market funds to gain profitable returns on investment in a long-term. ULIPs are considered as a popular option of investment as it not only provides the advantage of life cover and wealth creation but also offers the benefit of tax saving under Section 80C and 10(10D) of Income Tax Act.

Benefits of Investing in ULIP

As a hybrid insurance product, there are many benefits offered by a ULIP plan. Let’s take a look at it:

Provides Freedom to Choose the Life Cover Option

In a ULIP plan, the policyholder can choose the amount of life cover that they want. Most of the ULIP plans offer minimum life insurance as 10 times the annualized premium. However, the life cover amount can change from policy to policy and can amount as much as 40 times of annual premium or even higher.

Provides Freedom to Choose the Investment Type

There are majorly three types of funds offered under the ULIP plan- debt, equity, and balanced funds. Investors can choose to invest in any of these funds on the basis of their risk appetite and investment objective. For example, if the policyholder has a high-risk appetite and wants to gain high returns on investment then they can choose to invest in the equity plan. Similarly, if the policyholder wants to gain a steady return on investment, then they can choose to invest in debt funds.

Offers Flexibility

One of the major advantages of investing in ULIP is that it offers flexibility. In the unit-linked insurance plan, the insurance holders are offered the option to switch between funds as per their own requirements. Investors can choose to invest in equity instruments or debt funds depending on the market conditions and risk appetite.

Offers Liquidity

ULIP plans generally come with a lock-in period of 5 years, post that the policyholder can make partial withdrawals to fulfill the short-term financial objectives of life. This helps the insured to take care of the immediate expenses such as a child’s education, buying home, etc.

Provides Opportunity for Goal-Based Planning

ULIP plans are specifically designed to cater to the long-term financial objectives of the individual. The plan helps the individual to secure the financial gaols of life such as savings for the child’s education, retirement planning, wealth creation, etc. Moreover, along with all these benefits it also provides the added advantage of life protection and ensures financial security to the family against any type of eventuality.

Tax Benefits

As unit-linked insurance plans also offer the benefit of life protection, the insured can avail tax benefit under the plan. The investment returns and premium paid towards the policy are tax exempted under section 80C and 10(10D) of Income Tax Act 1961.

Is ULIP a Better Investment Option?

As there are many different investment options available in the market, choosing the right investment option is always a confusing task. It is a common question to ask whether or not ULIP is a better investment option compared to others. However, before choosing any of the financial products, it is important to be clear about-

What do you want to achieve from your money?

What is your risk appetite?

What is your financial objective? Whether you want to create a fund for retirement or you want to have a backup to deal with any type of emergencies that may occur.

What is the investment tenure?

Do you need life cover?

If you are clear about all these things and these are the requirements that you want to achieve, then ULIP is the best investment option to go for. ULIP plans are best suited for individuals who want to create wealth over a long-term period along with the benefit of insurance coverage. Not only this, but this plan also works as a lucrative option of investment for individuals who are new to the market and who wants to avail the benefit of capital appreciation with investment in market-linked securities.

How Does ULIPs Work?

 A Unit Linked Insurance Plan (ULIP) is a financial tool that offers the benefit of life protection along with the advantage of investment to the insurance holder. ULIPs provide an opportunity to the insured to invest in market-related securities like equity, debt, and balanced fund to gain investment returns in the long-term. The insured can choose to invest in different types of fund options as per their risk appetite and investment objectives.

ULIP plans are considered as a long-term financial product for wealth creation. However, as a life insurance product, it is more diversified and offers guaranteed returns to investors. In the ULIP plan, half of the premium amount paid by the insured is invested in market-linked securities like equity, debt, balanced fund, etc. whereas, the other half of the premium amount is used towards providing life coverage to the family of the insured.

The investments are managed by fund managers from the insurance company, taking away the need to track the investments. ULIP plans offer a wide range of fund options to invest in ranging from high-risk to low-risk. Moreover, it also offers the option of free switches between funds to deal with market volatility and maximize the profit.

Types of ULIP

Classification by Purpose

ULIP plans can be classified based on the purpose

ULIP for Retirement

In this plan, the insured need to make the payment while being in service which is gradually collected in a corpus amount. The amount collected is later paid to the insured in the form of annuities after the retirement.

ULIPs for Wealth Collection

This plan is specifically designed with an objective to create wealth over a long period of time. ULIP for wealth collection is recommended for individuals who are young and by investing in this plan the insurance buyers get the flexibility to fund their future financial goals.

ULIP for Children Education

As a parent, one wants to secure the future of their child financially, so that they can achieve the major milestones of life. Many ULIP plans offer money in instalment at a particular interval of time. Child insurance ULIP plans to ensure that all financial requirements of the child are taken care of even in the absence of the parents.

Classification by death Benefit

Type 1 ULIP Plans

In case of the demise of the insured, the beneficiary of the policy receives death benefit which is higher of the fund value or sum assured by the insured.

Type 2 ULIP Plans

In case of the demise of the insured, the death benefit paid to the beneficiary in type 2 ULIP is equal to fund value plus sum assured. It is important to keep in mind that the premium amount of type 2 ULIP is higher than type 1 ULIP.

ULIP Charges

In ULIP plans, the policyholder needs to pay various charges. These charges can be broadly classified as:

Mortality Charge

The mortality charge of the policy depends on various factors like the sum assured, age, tenure, etc. This charge is applicable for the insurance coverage offers by the policy and is deducted on a monthly basis.

Premium Allocation Charge

In the starting year of the policy, a fixed percentage is deducted from the premium paid as a premium allocation charge. The premium allocation charge includes the intermediary commission expenses, initial and renewal expenses. It is charged at a higher rate.

Switching Funds Charge

In most of the ULIP plans switching between funds is free up to a certain number in a year. Any further switches between funds might acquire a charge of Rs.100-Rs.250 per switch.

Fund Management Charge

This charge is levied by the insurance company to manage different funds in the ULIP. The fund management charge is deducted before arriving at the NAV figure. The maximum charge applicable every year is 1.35% of the fund value and is charged daily. 

Policy Administration Charge

This charge is applicable for the administration of the policy and is charged every month by the cancellations of units from the chosen funds. This charge can be imposed at a fixed rate or as a percentage of the premium amount.

Partial Withdrawal Charge 

After the completion of the lock-in period of 5 years, partial withdrawals are applicable under the ULIP plan. However, some plans offer unlimited withdrawals some are restricted up to 2-4 withdrawals. Any withdrawals more than this are charges based on the transaction.

Why Do you Need ULIP?

ULIPs are certainly one of the most lucrative investment options available in the market. Here are 5 reasons why you should consider investing in ULIP.

• Offers the option to invest in multiple funds
• ULIP plans have a transparent charge structure.
• The plan offers flexibility to choose the policy tenure and premium payment tenure.
• ULIP plan helps to create wealth in the long-term.
• Offers death benefit to the beneficiary of the policy in case of the unfortunate demise of the insured person.