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Unit Linked Insurance Plan is a multi-faceted life insurance product. A ULIP combines life insurance and investment. As a policyholder, you pay ULIP premiums, part of which is used for life insurance. The rest is pooled with other policyholders’ assets and invested in equity and debt, similar to mutual funds. ULIPs help you stay financially secure and grow your money.
Comparison Of ULIP With Other Products
- ULIPs combine insurance and investing benefits. It provides life insurance, an advantage over typical wealth-building strategies.
- ULIPs are linked to the Capital Market. They invest part of the premium in life insurance and the rest in equity, debt, or a mix of the two.
- ULIP savings are managed by professional fund managers. Investors can later switch between equity and debt.
- ULIPs carry a lock-in period of 5 years. The insurance cover would cease immediately in case an investor surrenders the ULIP plan in the first three years. However, the surrender value can be paid only after three years.
Benefits Of ULIP
Life cover
With ULIPs, you can save money and get life insurance at the same time. It provides security for a taxpayer's family in case of emergency, such as death.
Income tax advantages
Not many know that ULIP premiums are tax deductible under Section 80C. The policy's maturity returns are tax-free under Section 10(10D) of the Income-tax Act. This policy has dual benefits.
Long-Term Financial Goals
Compounding makes ULIP a good long-term investment, which increases net returns. Under ULIP, the mantra is to keep the policy active as long as possible.
Portfolio flexibility
ULIPS allow you to switch between debt and equity based on your risk appetite and market knowledge. Insurance companies allow few free switches.
Types Of Funds Under ULIP
Under ULIP plans, some of the most popular investment options are: –
These ULIP funds are also known as growth funds. They invest in high-risk equities and stocks and are the most rewarding and riskiest ULIP investments. Medium-to-high risk investors should consider these plans. High-risk, high-reward.
Index funds are funds that invest in products that represent a specific index on an exchange in order to match the index's movement and returns, such as purchasing BSE Sensex shares.
These ULIP plans invest investors' money in highly liquid money market instruments like treasury bills, call money, and certificates of deposit (CD). These funds mature in a few weeks to months, unlike other ULIPs. Most ULIP investments have strong credit ratings, making them safe for low-risk investors.
These ULIPs invest in government and corporate bonds, so here the risk is low. These ULIPs are best for low-risk investors who value fund security over higher returns.
Balanced funds combine debt and equity. Part of your investment is in equities and other high-risk instruments, while the rest is in low-risk fixed interest tools. These funds offer capital growth with low risk.
A pooled investment security called an exchange-traded fund (ETF) functions very similarly to a mutual fund. ETFs often follow a certain sector, index, commodity, or other assets, but unlike mutual funds, they can be bought or sold on a stock exchange just like normal stocks can.
Why Should You Invest in ULIP?
Because ULIPs guarantee a predetermined payment regardless of whether or not the investment plan is profitable. Mutual fund returns, on the other hand, fluctuate depending on the risk element. While equity mutual funds have the ability to provide larger returns, debt mutual funds have the potential to provide somewhat lower returns.
Features Of ULIP
The following are the features of the ULIP
Selection of Investment
ULIPs allow you to invest based on your risk tolerance. Equity funds are riskier than debt funds. Investors can invest in shares, debt funds, or balanced funds, depending on their risk appetite.
Partial Withdrawal
After the five-year lock-in period, you can also partially withdraw money to cover any financial emergencies. Insurance companies determine the number and timing of withdrawals.
Lock-in Period
The money invested in ULIPs is kept locked up for a minimum of five years. The policyholder is prohibited from making any withdrawals from the funds during this time. He can't switch or surrender the funds either.
Mode of Payment
According to their convenience, policyholders can choose between paying their premiums annually, half-yearly, quarterly, or monthly.
Comparison Of ULIP With Other Products
| BASIS | ULIP | MUTUAL FUNDS |
| Objective | Long-term plans that help with both insurance and investing. | Perfect for short- to medium-term investments. |
| Regulatory body | IRDAI. | SEBI. |
| Return on investment | The return is linked to Equity, so it can change. The payoff is small. | The return is tied to Equity, so it can change. The return is bigger than the hybrid ones. |
| Flexibility | You can choose how much of your investment goes to insurance and how much to equity. | There is no flexibility because all money is invested in equity. |
| Tax benefit | Available under Section 80C. | Under ELSS of Section 80C. |
| Lock in period | Minimum 3 – 5 years. | No lock in period. |
| Liquidity | Not very liquid. | Since it is traded more often, it is more liquid. |