Unit Linked Investment Plans, commonly abbreviated as ULIPs, have recently gained popularity among investors due to their multiple features and benefits.

ULIPs are a type of investment plan that provide market-linked returns while also offering a life insurance cover. This means that ULIPs offer investors the convenience of investing in the markets and providing a life insurance cover at the same time, which serves as a two-in-one benefit.

What is a ULIP?

ULIPs are a financial product that combines investment and insurance in a single plan. In this plan, an individual invests a certain amount of money in various funds that are offered by the insurance company.

These funds could be equity, debt, or a combination of both. The investment is then managed by professionals who invest the amount in the financial market to generate returns.

Furthermore, ULIPs also offer investors a life insurance cover. The sum assured is determined by the premium paid by the investor, and if the investor passes away before the maturity of the plan, the nominee receives the sum assured as a death benefit.

This ensures that the investor’s family is financially protected in the event of an unforeseen situation.

How do ULIPs work?

Understanding the working of a ULIP is relatively simple. When an individual purchases a ULIP plan, they choose a sum assured for the life insurance component. The premium paid by the individual is split between investment and the insurance cover.

For instance, if an individual pays a premium of Rs. 50,000 for a ULIP plan, a portion of it will be allocated to the life insurance cover, and the rest will be invested in various funds offered by the insurance company.

The investment portion of the premium is invested based on the funds chosen by the investor. These funds are managed by professional fund managers who aim to generate higher returns based on market conditions.

The investment returns are then credited to the investor’s account.

As the investment is market-linked, the NAV or the net asset value of the fund determines the returns. When an investor redeems their investment, the NAV at the time of redemption is used to determine the final redemption value of the investment.

It is thus essential to invest in ULIP-based funds based on the investor’s risk appetite and investment objectives.

Types of ULIP funds

ULIPs offer investors the flexibility to invest in various funds, depending on their risk appetite and investment objective. Some of the common ULIP funds that are offered by insurance companies include:.

Equity funds: These funds invest in equity shares and aim to provide higher returns in the long run.
Debt funds: Debt funds invest in fixed income securities like bonds and aim to provide stable returns.
Balanced funds: Balanced funds invest in both equity and debt, aiming to provide a balance between returns and stability.
Money market funds: These funds invest in highly liquid instruments like government securities and treasury bills to provide stable returns.

Benefits of ULIPs

ULIPs offer various benefits to investors, making them an attractive option for individuals looking to invest in the market while providing life insurance cover. Some advantages of ULIPs include:.

Market-linked returns: ULIPs offer investment returns based on market conditions. Thus, investors can earn higher returns than traditional life insurance policies with fixed returns.
Life insurance: ULIPs offer a life insurance cover, ensuring the financial protection of the investor’s family.
Tax deductions: The premium paid towards a ULIP policy is eligible for tax deductions under Section 80C of the Income Tax Act.
Flexibility and liquidity: ULIPs offer investors the flexibility to switch between funds based on their investment objective and risk appetite. Additionally, some ULIPs allow partial withdrawals from the policy.

Charges in ULIPs

Like any other investment product, ULIPs also come with charges. These charges include:.

Premium allocation charges: A portion of the premium paid is deducted as premium allocation charges. This charge is levied to cover expenses like agent commission, underwriting expenses, and so on.
Fund management charges: This charge is levied to manage and maintain the ULIP funds. The charge is levied as a percentage of the fund value.
Mortality charges: Mortality charges are levied to provide the life insurance cover. The charges are based on various factors like age, gender, and health status of the investor.
Surrender charges: ULIPs come with a lock-in period. If the investor wishes to surrender or withdraw from the policy during the lock-in period, they are charged a surrender charge.

Conclusion

ULIPs offer investors the convenience of investing in the financial market while also providing a life insurance cover.

While ULIPs come with various features and benefits, it is essential to choose the right plan based on the investor’s risk appetite, investment objective, and financial goals. It is also important to understand the charges and the lock-in period of the ULIP before investing in the plan.