scorecardresearchWhat is ULIP and how does it work?

What is ULIP and how does it work?

Updated: 20 Apr 2022, 12:30 PM IST
TL;DR.

In contrast to standard insurance coverage, a unit linked insurance plan is a two-in-one integrated plan that provides its investors with both insurance and investment benefits. They are suited for people with varying risk tolerances since they provide policies with varying risk profiles. Continue reading to learn more about it.

Unit linked Insurance Plan (ULIP) is a two in one investment and insurance opportunity that allows an individual to realise two goals simultaneously.

Unit linked Insurance Plan (ULIP) is a two in one investment and insurance opportunity that allows an individual to realise two goals simultaneously.

Unit linked Insurance Plan (ULIP) is a two in one investment and insurance opportunity that allows an individual to realise two goals simultaneously. One can reap the benefits of a life insurance cover and investment in financial equities with a single product.

In ULIP the premium paid by the individual is divided and two different proportions are assigned, one goes towards a life cover and the other is invested in the financial security or fund selected by the buyer. ULIPs in India are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

How does ULIP work?

When an individual invests in ULIP, he/she has to make an initial lump sum payment. Following this, he/she has to make regular premium payments which can be annual, semi-annual, or monthly. The insurance company invests part of the payment made by the policyholder in the financial instrument he/she chooses.

The portfolio chosen at the outset can be modified and by paying extra ‘switching charges’ investors can switch between funds on the basis of fluctuations in the market. To spare the investors of any forthcoming hassles professional fund managers take care of the investments on behalf of the benefactors. “Fund management charges” are applicable for this service.

The remaining portion of the premium which is not invested is dedicated towards providing an insurance cover.

ULIPs have a minimum lock-in period of five years after which the investors are not obligated to hold the policy. However, experts suggest that it should be held for the long term to reap maximum benefits.

READ MORE: Does it make sense to include ULIPs in your investment portfolio?

Types of ULIP

There are 4 major types of ULIPs:

Equity Funds: These are high-risk ULIPs as the investment is primarily done to purchase equities and stocks in companies. These securities have an inherent risk involved with them thus it makes these the riskiest and the most rewarding ULIPs.

Debt/ fixed-income funds: Under these ULIPs, funds are allocated to be invested in government securities, bonds, debentures, fixed-income securities, etc. Compared to equity funds, these have a medium risk involved with them.

Hybrid Funds: Under this, funds are invested in a combination of high risk and medium risk securities i.e. the amount is divided between equity and debt market instruments.

Liquid/ Cash funds: As the name suggests, under this the premium is invested in low-risk liquid investment options such as cash equivalent securities and money market instruments.

Who should invest?

ULIPs are medium to long-term policies with varying risk profiles that make these suitable for individuals with diverse risk appetites. Not only do they give life covers but Unit linked Insurance Plans are also flexible and individuals can make prompt decisions regarding their investments on the basis of the market conditions. 

Since these are structured plans, one can set key financial goals and fulfil them through returns from ULIP. In addition, the premium paid on ULIP investments is eligible for tax exemption for a sum up to 1.5 lakh.

There are various types of ULIPs that investors can choose from. ULIPs are a solid option for investors with diverse risk appetites who want to invest their funds in securities and also save for retirement simultaneously.

First Published: 20 Apr 2022, 12:27 PM IST