All You Need To Know About Unit-Linked Insurance Plan (ULIP) – Forbes Advisor INDIA

We all have one or the other financial goals and long-term financial objectives to fulfill. One may need to save enough money for their dream car or dream home, or saving for children’s education or their marriage. Whatever the goal is, you need funds to make your dreams true along with the life protection cover, so that your near and dear ones do not suffer because of your lack of financial planning.

Unit-linked insurance plans (ULIPs) are the kind of financial instruments which are best suited for those who want to save for the long-term and also require a life protection cover. ULIPs are the investment cum insurance plans, where a policyholder pays the premium and one part of it gets invested in the choice of your funds and the other is used for providing insurance coverage. Here’s a detailed read on ULIP plans, how they function and the list of ULIP plans which are offered by the leading insurance companies of India. 

What Is A ULIP And How Does It Work?

A ULIP is a mix of an investment instrument as well as life insurance policy. It is a policy or a plan which provides the benefits of both wealth creation and life protection. To invest in ULIP plans, it is important to know how they work and how one benefits from such financial instruments. As we know that ULIP is an insurance as well as a savings instrument.

Like other insurance plans, a policyholder is supposed to pay the respective premium amount. The main difference is that only a part of the premium amount goes for life insurance coverage, and the rest is invested in a mix of investment funds.

The aggressive kind of policyholders can opt for equity-based funds, while the conventional investors can opt for debt-oriented funds. However, if one wants to have wealth creation but with security, then they can choose balanced funds (mix of equities and debts).

One interesting feature of ULIPs is that the policyholders can easily switch between funds depending on their needs and requirements at various stages of life. For instance, at a young age, one can choose equity-oriented funds which give good returns but are associated with higher risks. And, as you grow in life, our responsibilities also increase. At this stage of life, one can then switch to debt or balanced funds which offer comparatively lower returns but also have lower risks.

Insurance Companies offering ULIP Plans 

To know more on the top-performing ULIP plans, read our detailed article on the best performing ULIP plans. 

Features And Benefits Of ULIPs

• Receive the dual benefit of investment and insurance under one plan.
• Flexibility to switch between different fund options such as equity or debt funds depending on your financial goal.
• Option to redirect the future premiums between different available funds options at any given point of time. The policyholder needs to mention their policy number and specify the funds in which they want to redirect the premium.
• Flexibility to withdraw funds partially after the completion of five years of lock-in-period.
• ULIPs are tax saving instruments. The premium that is paid towards the policy is exempt to deduction under section 80C of the Income Tax Act.
• It is ideal for long-term investment goals such as child’s higher education, buying a house, child marriage and so on.
• Other than the above-mentioned benefits, ULIP plans also offer death benefits along with survival and withdrawal benefits.
• ULIPs allow users to top-up the policy at any time.

Things to Keep in Mind Before Investing in a ULIP

☐ One must choose their ULIP plans as per their risk appetite. If a policyholder is ready to take risks then they can invest a part of their premium in equity funds while those who are risk averse can park their funds in debt funds.

☐ Before investing, know all the charges of ULIP plan such as mortality charges, policy administration charges, fund management charges, premium allocation charges.

☐ While purchasing a ULIP plan, check the cost of switches, ease of switch of funds, free switches in a year.

☐ ULIP provides you the flexibility of three payment options such as single, limited or regular. Choose that option which you are comfortable with to continue the plan for a longer duration.

☐ Have a fair idea about your financial goals such as your child’s education, marriage, lifestyle changes and so on, while deciding on the life insurance coverage.

Who Should Buy A ULIP Plan?

• Investors who believe in creating their wealth by investing in equity.
• Investors who have a specific or many long-term financial goals such as a child’s higher education or for retirement planning and so on.
• Investors who want to enjoy life protection coverage, investment, and tax exemptions benefits, all together in a single investment product.

ULIP Linked Charges

• Policy Administration Charges: When charge is levied by the insurance company to cover the costs of administration of the policy such as paperwork expenses.
• Fund Management Charges: When charge is levied by the insurance company to manage your various investment funds.
• Mortality Charges: When charge is levied by the insurance company to provide you the death cover.
• Partial Withdrawal Charges: When charge is levied by the insurance company if the policyholder withdraws the funds after the lock-in-period of five years.
• Premium Allocation Charge: When a certain percentage of the first-year premium is levied by the insurance company before allocating the policy.
• Surrender Charges: When charge is levied by the insurance company if the policyholder surrenders the units in hand.

What Is A ULIP Calculator?

A ULIP calculator is an online tool which facilitates the policyholder to calculate the premium quotes of various ULIP policies and their expected returns. The ULIP calculators are designed in a way to compare the different ULIP plans and thus assist to choose the best-suited plan which meets your goals as well as fits in the budget.

One can decide the amount of premium that is needed to invest to meet your short-term and long-term financial goals with the help of ULIP calculator.

While calculating premium quotes, the policyholder needs to fill-in the important details, such as:

• Amount to be invested.
• Frequency of premium payments.
• Tenure of the ULIP plan.
• Mention the percentage of the premium, which one wants to allocate for invest in the funds.
• Type of fund mix – equity, debt or balanced funds.

Bottom Line

ULIP plans offer multi- dimensional benefits, if chosen carefully. Therefore, While investing in a ULIP, make sure to read the entire policy brochure thoroughly. It is important to have a fair idea of the features and terms and conditions related to the specific plan. If you need any sort of clarity, do not hesitate to contact a representative of the concerned insurance company. Select the best-suited ULIP plan only after understanding the benefits, features, charges, funds and and then make the wise decision.

Frequently Asked Questions (FAQs)

What is the lock-in-period of a ULIP plan?

The minimum lock-in-period of a ULIP plan is five years.

How are ULIPs different from conventional insurance plans?

ULIP is a financial instrument which offers both investment and insurance benefits though a single policy. The traditional plan might offer guaranteed returns which comes with low risk as compared to a ULIP plan. ULIP are considered to be more transparent than pure traditional insurance plans which have more hidden charges.

Is there any benefit on the maturity of the ULIP plan?

Yes. At the time of maturity of a ULIP plan, the policyholder is entitled to receive the fund value on the basis of prevailing NAV (net asset value)

Can I cancel my ULIP policy?

Yes, the policyholder can cancel their ULIP plan after the completion of the lock-in-period of five years. However, the insurance company charges when someone surrenders the policy before the lock-in-period, which also ceases the life cover benefit.

Is ULIP policy a risky instrument?

It totally depends upon the investment funds chosen in the policy. If someone is not so diligent with the market moves, then it is better to invest in low-risk investment funds. However, people with a high risk appetite can surely choose equity funds which tend to give higher returns than any other form of investment funds.