What is ULIP?

ULIP full form is Unit-Linked Insurance Plan. ULIP is basically a combination of insurance and investment plan. ULIP is a market-linked financial instrument which offers the combined benefit of insurance and investment in the same plan. ULIP are linked to the capital market and provide the flexibility to invest in debt or equity fund according to the risk appetite of the individual. The benefit of life protection along with the choice to choose the investment option makes ULIP a popular financial amount the insurance seekers.

Why you should buy ULIP?

There are many benefits to investing in ULIP plans. Here we have briefly discussed the reasons why one should consider investing in ULIP plans.

Flexibility

One of the major benefits of investing in ULIP is that it offers flexibility. In ULIP plans the insurance holders are offered the option to switch between funds as per their own requirements. The investors can choose to invest in equity instruments or debt funds depending on the market conditions and risk appetite.

Tax Benefit

As ULIP 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.

Risk Appetite

ULIP provides an opportunity to the investors to zero in on a policy as per their risk appetite. If the investors have a low-risk appetite then they can consider investing in debt funds whereas if the investors have a high-risk appetite then they can consider investing in equity instruments in order to gain maximum return on investment.

Long-Term Investment

ULIPs are considered as one of the best long-term investment options for individuals who want to gain the dual benefit of investment cum insurance. The policy comes with a lock-in period of 3 years and offers a profitable return on investment over a long period of time.

Low Charges

The unit-linked insurance plans come with very low allocation charges. As per the Insurance Regulatory and Development Authority of India, the annual charges applicable on ULIP plans range from 2-2.5% per annum for the starting 10 years. 

How to Select a ULIP?

While zeroing in on a plan, it is very important for insurance buyers to consider the important aspects of it. Here we have mentioned some of the important points that should be kept in mind while investing in ULIPs. By analysing one’s own risk appetite and keeping these important points in mind the investors can maximize the returns and achieve their short-term and long-term financial goals of life.

Investment Objective

Most insurance buyers want to invest in ULIPs so that they can achieve their financial objectives of life, like planning for retirement, child’s education, creating wealth for the future, etc. According to the investment objective of an individual, he/she should zero in on a plan that best suits their requirement. 

Flexibility in Investment

The investors should invest in ULIP plans which allows for investments across different classes like equity, debt, bonds and stocks. Investing in different classes of funds results in profitable returns and offers high-risk investments. 

Compare the plans

Before zeroing in on a plan it is important for policy buyers to compare the plans online. By analysing the premium payment, expenses and performance of ULIP plan the investors can choose a plan according to the requirement and suitability. In order to maximize the returns, one should consider investing in different funds like equity, debt, stocks, bonds, etc. 

What is ULIP & How Does ULIP Plans Work?

A Unit Linked Insurance Plan (ULIP) is a financial tool that offers the benefit of life protection along with the advantage of investment for the insurance holder. ULIPs provide an opportunity to the insured market-related securities like bonds, stocks, or mutual funds. The insured can choose to invest in different types of fund options based on their risk appetite and investment goals.

Primarily ULIPs were considered as a long-term financial product for wealth creation. However, it did not guarantee investment returns. But, nowadays, ULIP plans are more diversified and offers guaranteed returns to the investors.

In ULIP plan, half of the premium amount paid by the insured is invested in market-linked securities like equity, bond, stocks, 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 as per the one’s own risk appetite. Moreover, it also offers the option of free switches between funds in order to deal with market volatility and maximize the profit.

Types of Funds Offered by ULIP

ULIP plans offer an array of fund options to invest in. We can categorize the funds into high risk, medium risk and low-risk funds. Let’s take a look at the different types of funds offered by ULIP plans.

Balanced Funds

Balanced funds are the combination of fixed interest and equity instruments. This fund offers the combined benefit of capital appreciation and safety by making the investment in fixed interest components and equities. This fund keeps a balance of bond and stock options which results in guaranteed returns; the investment made in bonds equalizes the possible risks of equity investments. Balance funds are best suited for individual who has a medium risk appetite and wants to make a safe investment.

Cash Funds

Cash funds offered by ULIP are also called as money market fund.  Cash funds are a safe investment option for investors who have a low-risk appetite. However, the fund offers low returns on investment.

Equity Funds

These are open-ended fund option which aims to generate profitable returns by making the investment in equities and equity-related securities. Equity funds are the best investment options for investors who have a high-risk appetite and want to gain maximum returns on investment.

Income Funds

In this fund option the money is majorly invested in debt funds, corporate bonds and government securities. By making the investment in fixed income securities like government fund and corporate bonds, income fund provides the insured with a low-risk and moderate percentage of investment returns.

Features of ULIP Plans

As an investment cum insurance product, ULIP offers excellent features. Lets’ take a look at some of the salient features of ULIP plans.

Flexibility

As one of the best investment option, ULIP offers flexibility in every aspect of the policy.  In a ULIP plan, the insurance buyers can choose the amount of life cover according to their own requirement. Moreover, ULIP plans also offer the option to increase or decrease the premium amount depending on the current financial status of the policyholder, after the completion of certain policy years.

Riders Benefits

Riders are add-on benefits offered by ULIP plans that can be purchased along with the basic coverage offered by the policy. Some of the rider benefits offered by ULIP plan are:

• Accidental Death and Permanent Disability Rider
• Term Rider
• Critical Illness Rider
• Waiver Premium Rider

By using these rider benefits the policyholder can avail enhanced protection under the same policy.

Variety of Fund Options

ULIP plans offer the investors an array of fund options to choose from ranging from equity, debt, bond, stocks, etc. In order to cater to the requirements of the investors, most of the insurers provide its customer with the flexibility to choose from different fund options according to their requirement and risk appetite.

Transparency

Along with the benefit of flexibility, ULIP plans offer transparency to the investors. In ULIP plans the investment made in funds are managed by expert fund managers of the insurance company. The insurance company aims to provide maximum return on investment so that the investors can create a financial cushion over a long-term period.

Liquidity

ULIP plans offer liquidity to the policyholders Most of the ULIP plans comes with a lock-in period of 3 years or 5 years after which the policyholder can make either partial or full withdrawals.

Benefits Offered by ULIP Plans

One of the major benefits of investing in ULIP is that the insured gets the double benefit of life protection along with the benefit of investment returns. Apart from this, as one of the best investment option, ULIP plans offer the opportunity to create wealth in a long-term and achieve the financial objectives of life. Let’s take a look at some of the benefits offered by ULIP plans.

Tax Benefits

ULIP plans not only to offer the benefit of life protection and investment returns but also offer the advantage of tax deduction under section 80C of the Income Tax Act. The premium paid towards ULIP plans and the investment returns are tax exempted under section 80C and 10(10D) of Income Tax Act 1961.

Minimize Risk

As in ULIP plan, the money is invested in different funds and it also offers life protection, ULIPs are low-risk investment instrument. ULIP plans are a great investment option for policyholders who want to avail the benefit of market growth without actually taking more risk and participating in the stock market.

Death and Maturity Benefits:

Let’s take a look at death and maturity benefit offered by ULIP plans.

• Death Benefits

In the event of the uncertain demise of the policyholder, the death benefit is paid to the beneficiary of the policy. The death benefit offered by the insurance company is the higher of sum assured amount or fund value. However, depending on the cause of decease (natural or accidental) death benefits can vary.

• Maturity Benefits

In case the insurance holder survives the entire tenure of the policy then maturity benefit equal to the amount of fund value is paid to the policyholder after the completion of the policy tenure. 

Types of ULIP Plans Classification by Purpose

ULIP plans can be classified on basis of their 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 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. There are many ULIP plans that 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.

Type of ULIP Plans Classified by Death Benefit

Type 1 ULIP Plans

In case of 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 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.