What are ULIPs: Understanding Unit Linked Insurance Plans

Smart investment is a key to financial stability and security for you and your family. If you are looking for a financial product that combines investment and insurance, then you must consider the ULIP plan. If you are unaware of it, then through this comprehensive blog, you will get a clear understanding of what the ULIP plan, how it works, its features, tax benefits, and much more.

What is ULIP?

ULIP full form in insurance is Unit Linked Insurance Plan. As the name suggests, it is a single insurance plan that offers the dual benefit of life insurance and investment. The premium paid in ULIP has two parts: one covers the life insurance and the other is invested in the market funds.

How Does Unit Linked Insurance Plan (ULIP) Work?

After learning about the basic aspects of what ULIP insurance is, let’s understand how it works with an example.

Suppose you are 35 years old and buy a ULIP policy today with a 25-year tenure. Under it, a part of the premium is directed towards life insurance of 50 lakhs, and the rest is invested in mutual funds.

Situation 1: If You Die Before ULIP Maturity

In this scenario, your family will receive the higher of two amounts - either the life insurance of 50 Lakhs or the value of the mutual funds at the time of your death. Therefore, the ULIP plans will protect and financially support your family in your absence.

Situation 2: If You Survive the 25-Year Tenure

In this case, you will receive the value of the mutual funds accumulated at the time of ULIP maturity. Therefore, it secures your retirement and helps you achieve long-term financial goals.

As ULIP stands for Unit Linked Insurance Plan, thus it financially takes care of your loved ones in case of unforeseen events and also provides you with stability to achieve long-term goals.

Benefits of Buying the ULIP Policy

Here are the 6 benefits you will enjoy from ULIP investment:

1. Dual Benefit of Life Insurance and Investment
   When you purchase the ULIP policy, the beneficiaries get the life insurance benefit in case of a unfortunate event. It takes care of your loved ones and ensures that they don’t suffer from financial instability in your absence.
2. Flexibility to Switch Funds During The Tenure Period
   One of the biggest advantages of the ULIP policy is the flexibility to switch funds. This flexibility enables you to yield the best financial returns on your investment. There are very less financial instruments that provide you with this leverage. Based on the market performance, you can switch from equity to debt and vice-versa. ULIPs provide the additional benefit of choosing the premium payment option that fits your financial situation. You can pay the premium either annually, semi-annually, quarterly, or monthly.
3. Liquidity Option of Partial Withdraw
   In case of emergency, you can avail of a partial withdrawal facility under this investment scheme.
4. Top-Up Option to Maximize Return
   With time, new needs arise and lifestyle changes. ULIP financial instrument comes with a top-up option, implying that you can invest more money into the existing ULIP plan during the policy tenure. The top-up feature not only maximizes the return but also takes away the stress of buying a new policy for new needs.
5. Long-Term Financial Goal Planning
   ULIP acts as a long-term investment instrument option, thus it enables you to achieve your long-term financial goals like financing your child’s higher education or buying a home post-retirement.
6. Tax Benefits Under Income Tax Act, 1961
   If you’re looking for a financial instrument for tax-saving purposes, then the ULIP policy is right for you. It offers incredible tax benefits under the Income Tax Act,1961.
   • The premium paid for the ULIP plan is subject to tax deduction under section 80C of the Income Tax Act, 1961.
   • Under section 10(10D) of the Income Tax Act, the returns on ULIP policy at the time of maturity are tax-free.
   • The switch from one fund to another is also tax-exempted.

Why Buy ULIPs Investment?

The following features make the Unit Linked Insurance Plan stand out from other investment instruments:

1. Dual Coverage of Investment and Insurance

   The differentiating factor for ULIP policy from others is that it covers insurance as well as investment. Thus it performs the dual function of protecting your family from any unforeseen events (insurance) and providing financial stability post-retirement (investment).

2. Single Premium

   In ULIP, you are required to pay only a single premium that covers insurance as well as investment. Thus it takes away the financial burden of paying premiums separately for insurance and investment.

3. Market-Linked Returns

   In ULIP, the investments are market-linked. It means that part of the premium is invested in the market funds of your choice. Therefore you enjoy the benefit of market appreciation on your ULIP investment.

4. Choose Market Funds As Per Your Choice

   With the ULIP plan, you have the flexibility to choose the market funds as per your financial goals and risk tolerance. Moreover, you have to leverage to switch between funds in the future.

Ways to Maximize Returns from ULIP Investment

Here are the proven ways to maximize your returns from the ULIP plan:

1. Start As Soon As Possible

   When you buy a ULIP plan at an early age, your money gets time to grow and you yield better returns in the long run. There is an added advantage of starting early - a longer duration offsets the short-term market volatility. Moreover, your loved ones come under the realm of the life cover from an early age.

2. Regular and Consistent Investment

   The financial discipline is important to gain long-term benefits from the ULIP plan. Be consistent with the premium payment. Keep your ULIP plan active by opting for the automatic premium payment method.

3. Benefit from Various Fund Options As Per Market Condition

   When you buy the ULIP plan, you get the leverage to switch between the funds during its tenure. This flexibility enables you to maximize your returns by acting upon the market condition. During the volatile market conditions, you can move from risky equity funds to low-risk debt funds. When the market is favorable, switch from the low-return debts to high-return equity funds.

4. Routine Review of Portfolio

   Keeping a regular check on your portfolio helps you make an informed decision to maximize your ULIP returns. You can add more money or switch between funds only when you are keeping track of your portfolio.

Who Should Consider ULIP Insurance Plan?

Unit Linked Insurance Plan is a beneficial financial instrument for the following investor classes:

1. Investors with Medium and Long Term Goals

   In ULIP, as part of the premium is directed towards market-linked investments, it is an ideal instrument for investors who have medium and long-term goals.

2. Investors with Different Risk-Taking Ability

   The ULIP plan is suitable for every type of risk profile as individuals can invest in equity or debt based on their risk-taking ability.

3. Investors Across Different Life Stages

   There are different goals at every stage of life. ULIP is the ideal investment plan for investors to achieve their goals at different life stages.

Funds Option in ULIP Plan

Though ULIP stands for Unit Linked Insurance Plan, a part of a premium is invested in market funds. To make an informed decision, you must know what are fund options available under this insurance plan.p>

1. Equity Funds

   In this, you invest a part of the ULIP premium in equity funds or assets. Though the risk is high in equity funds, it offers a high return.

2. Debt Funds

   You can invest a part of your ULIP premium in debt instruments. They carry low risk with stable returns.

3. Balanced Funds

   Another fund option is balance funds. In this, you create a portfolio that has a balance of equity assets and debt market instruments.
   Based on your risk ability and long-term financial goals, you can choose the fund option. Based on the market performance, you can switch from one fund option to another during the policy tenure.

How to Choose the ULIP Plan?

The careful consideration of factors enables you to buy the best ULIP plan.

1. Evaluate Long-Term Financial Goal

   You must assess your long-term plans like buying a home, starting your own business, or funding higher education to evaluate the investment premium and tenure. ULIP policy works best for long-term goals that don’t require early withdrawals as the charges are levied in premature withdrawals.

2. Consider Life Insurance Cover

   You must evaluate the daily expenses, lifestyle, medical, and health conditions of your loved ones to decide the life cover. After all, you want to offer them a secure future in your absence.

3. Pay Attention to Benefits and Features

   ULIP plan is a combination of life insurance and market-linked investment. It provides the flexibility to switch between funds and permits top-ups to maximize returns. As different ULIP plans have different features, it becomes important to check all features and benefits before choosing the ULIP plan.

4. Consider Charges

   Many charges are associated with the ULIP plan and they make the difference in premium amount. As you have to bear these charges, it is important to consider them in buying the best plan.

Final Words

After knowing what is ULIP plan meaning, its features, tax benefits, and much more, buying the ULIP plan will be a win-win situation for you. It is a perfect combination of insurance and investment under one roof. It not only creates wealth to achieve your long-term financial goals but also secures your family's future in times of uncertain events.

Related Articles:

All you need to know about changes in Form 16

Understanding ULIPs: How They Combine Insurance & Investment

Investing in ULIPs: 14 Types of Charges in ULIP Plans That You Must Know

ULIP Taxation: What are the ULIP Tax Benefits?

Mortality Charges in ULIP: How Mortality Charges Impact Your ULIP Investment?

Disclaimer: