What is Unit Linked Insurance Plan (ULIP) and how is it beneficial?

Know how you can benefit from ULIP which offers insurance and investment options.
What is Unit Linked Insurance Plan (ULIP) and how is it beneficial?
3 mins
2 Feb 2023

Unit-linked Insurance Plans (ULIPs) are type of insurance plans that come with combined package of insurance and investment. ULIPs, over the years, have become popular investment instrument, especially among the first-time investors. As, these insurance plans come with a lot of flexibility – premium payment and choosing the best suited investment options with reduced risks.

These insurance plans give individuals a chance to increase their wealth while also providing the benefits of a life insurance policy to secure their future. It helps you achieve the financial objectives such as planning for early retirement, saving for child's higher education, and securing post-retirement life. In short, ULIPs give policyholders a life cover along with long-term financial goals.

How does ULIPs work?

ULIPs are goal-based investment instruments. They are designed in a way that will enable a person to promptly reach their financial objectives. However, you should be aware of where the money goes while investing in ULIPs before purchasing this policy.

When investing in ULIPs, the investor/ policyholder needs to pay a fixed premium periodically against the plan. A portion of this premium is used to give insurance coverage, while the other portion is used for investment in equity or debt funds.

People with high-risk appetites may consider choosing equity-oriented funds. On the other hand, it is advisable to save hard-earned money in debt funds if one doesn’t want to risk it. People frequently prefer investing in balanced funds, which are a mix of debt and equity funds, to get respectable returns without taking on significant risk.

With ULIPs, the policyholder has the flexibility to switch between funds according to his/ her requirement and financial goals for investment. Depending on the success of the market, ULIP investments allows you to convert from equity to debt funds and vice versa, which is also known as the fund-switching ability in ULIP. For instance, you can adjust your investment portfolio as needed and move to better-performing funds if funds are underperforming. This also helps the policyholder to spread the risk by investing in different funds.

For example, if an individual buys a ULIP early in life, they have less financial responsibility and can choose a greater-risk investment (stock funds).

There is a mandatory lock-in period of 5 years in ULIP, as defined by the IRDAI. Once, the lock-in period is over, you can also withdraw an amount of about 20% of the overall fund, when needed.

Features and benefits of ULIPs

Investing in ULIPs is one of the market's most dependable tools for wealth building. This product offers a variety of advantages. Here are the benefits of investing in a ULIPs:

  • Gradually increases wealth
    The greatest investing vehicle for achieving long-term objectives is a ULIP, which offers the freedom to participate in both equities and debt funds and has a minimum lock-in duration of five years.

  • Dual advantages
    A single ULIP provides two benefits: the ability to get insurance coverage and make investments of your choice
  • Flexibility
    You are given the freedom to select the types of funds you want to put your money in. Additionally, you can change the funds in accordance with market movement.

  • High profits
    Choose to invest in funds that provide larger returns on your initial investment since you have the freedom to switch funds in response to changes in the market.

  • Tax advantages
    A number of tax benefits are offered by the policy under various provisions of the Income Tax Act of 1961.

  • Protecting oneself and one's family 
    You will be able to safeguard not only your loved ones but also yourself with the help of the life cover.

Investing in a holistic portfolio gives you financial security with increased wealth. ULIP gives you best of both products, financial security and returns. By understanding the pros and cons, and weighing your risk appetite, you can choose from the various ULIPs offered in the market that fits your requirement.


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