Life Insurance

What is ULIP Plan - Features, Benefits, Types & Charges

There are many financial goals that you may have, like funding your children’s higher education, having a comfortable retirement, or buying a house. All of these can be funded by investing in a ULIP…

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There are many financial goals that you may have, like funding your children’s higher education, having a comfortable retirement, or buying a house. All of these can be funded by investing in a ULIP. The full form of ULIP is Unit Linked Insurance Plan. These plans require the policyholder to make premium payments, a part of which is allocated to providing life insurance coverage. The remaining part is accumulated with the assets of the other policyholders and the total amount is invested in debt and equity instruments. 

What is ULIP (Unit Linked Insurance Plan)?

ULIP is a combination of life insurance and investment and it provides you with an opportunity to invest in debt and equity funds for wealth creation while providing life insurance cover at the same time. 

In other words, ULIPs offer a balance in the fund, with equity and debt component, with options to swap between the two, when there are market changes. On the other hand, your life goals are secured by life insurance coverage.

How Does ULIP Work?

When you buy a ULIP plan, some portion of the premium is granted to the life insurance cover. The other portion of the premium is invested in different debt and equity-related instruments. There are fund managers in insurance companies who take care of the investments so that the policyholder is saved from the hassle. The total amount is divided into units that have some face value and each policyholder is given the number of units according to the amount he invested. At any given time, every unit of the fund carries a Net Asset Value. The NAV reflects any fluctuations in the market value of the underlying assets. If a policyholder wishes to withdraw some amount from the accumulated corpus then the subsequent units are sold. Likewise, the policy charges are also deducted in the form of units. At the time of maturity, you can receive a lump sum or monthly installments, according to the ULIP plan that you have chosen.

ULIP Features:

  • Benefits of Insurance and Investment: The ULIP aims to help you maximize your capital appreciation on your investment through market-linked instruments. On the other hand, it offers life insurance coverage benefits to you and your family so that they are protected in case of an emergency.
  • Single and Regular Premiums: You can choose to pay the premium as a lump sum or you can pay a pre-determined premium periodically i.e., annually, semi-annually, or monthly 
  • Partial Withdrawals: ULIP lock-in period is of 5 years. However, once the lock-in period ends, you can make a fixed number of partial withdrawals from the collected fund without any charge.

Read, How life insurance can protect your family?

Types of ULIP Plans in India:

Funds To Invest In:

  • Equity Funds: The premium is invested in equity funds such as stocks. It promises higher rewards, but the risk factor is also very high. If your risk tolerance is more, then you can invest in these funds. 
  • Balanced Funds: The premium that you pay is invested in equity and debt instruments. These funds minimize the risk of investment to a great extent.
  • Debt Funds: The premium is invested in debt funds that have lesser risk but simultaneously the reward is also lower. 

Use of the ULIPs:

  • ULIPs for Wealth Creation: If you need a large sum of money to realize your financial goals then this is for you
  • ULIPs for Children’s Future: You can invest money to make sure that the future of your child is secure, in case of some unforeseen circumstances
  • ULIPs for Retirement: Under these ULIPs, you pay a premium till the premium payment tenure. On maturity, you receive an accumulated fund that you can use for your post-retirement needs

The demise of the Policy Holder:

  • ULIP Plan 1: You will get the higher the assured value or total fund value
  • ULIP Plan 2: You will get the assured value plus the total fund value

Benefits of Investing in ULIPs:

There are many ULIP benefits, and these benefits are mentioned in the list below:

  • Life Protection Coverage: In ULIPs, you get life insurance as protection for your loved ones in case of emergencies like accidental death of the policyholder, etc.
  • Flexibility: ULIPs are designed in a way that they give you an option to switch between debt and equity-based funds on your risk-taking appetite and changing needs. You also have the opportunity of partial withdrawals from the funds after the initial ULIP lock-in period is over
  • Tax Deduction Benefits: For the premium that you pay for a ULIP, you can avail of a tax deduction under Section 80C (up to 1.5 lakhs). Additionally, the money that you will get at the maturity of the policy/death of the policyholder is not taxable under Section 10(10D) of the Income Tax Act 1961
  • Long Term Financial Goals: If you have long-term goals like getting a house, sending your children for education abroad, etc then ULIP is a great choice because the money that you invest gets compounded. This means that your net returns are higher than keeping the money in your savings account or getting a fixed deposit even if you choose to exit the plan after the initial 5-year lock-in period

ULIP Charges:

These are the different ULIP charges that are levied:

  • Premium Allocation Charge: It is a fixed percentage that is deducted from the premium that you pay in the initial years of the ULIP. The charges include initial, renewal, and commission charges
  • Mortality Charges: These charges are imposed to provide the life insurance cover under the ULIP plan. These depend on several factors like age, the sum assured, etc, and are deducted monthly
  • Partial Withdrawal Charge: Under ULIPs, you can withdraw the funds partially after the lock-in period is over. Some plans restrict the number of free withdrawals and then charge you for the number of withdrawals that you do after the limit is exhausted
  • Switching Funds Charge: These charges are levied if you switch your funds between different available options. The switches are free up to certain times in a year after which you must pay a charge. 
  • Fund Management Charges: These are the charges that are imposed for the management of your funds under the ULIP. It is deducted before the NAV is ascertained. Mostly, the maximum charges are levied on equity funds whereas the charges on non-equity are lower.
  • Policy Administration Charges: These charges are calculated at a fixed percentage of premium and are levied each month by canceling the proportionate units from all the funds chosen.

Who Should Invest in ULIPs?

ULIP is suitable for salaried as well as self-employed individuals who have dependents and who wish to get a long-term insurance plan that gives them an opportunity for wealth creation and life insurance in a single policy.

You can invest in ULIP for various reasons like your children’s education, retirement, or any other financial goals that you have for yourself. Moreover, even though ULIP is a market-linked insurance plan, you can invest in it even if you do not have much knowledge about the equity market and want to avail capital gains on your money. 

How to Get the Best ULIP Plan for Yourself?

  • Financial Goals and Risk Appetite: A ULIP plan gives you the choice of investing in equity and debt funds. Equities provide you high growth potential in the long term, but the risk is also higher whereas debt options offer higher protection to the money that you have invested. So, you must choose the ULIP plan according to your risk appetite and financial goals in the long term. 
  • Compare ULIP plans: After you have determined the risk tolerance and your financial goals, the next step is to look at the different plans that are there in the market. Compare different plans according to the ULIP performance, background charges, premium payments, etc. Also, analyze the nature of funds that the ULIP invests in so that you can understand the potential returns that you will get.
  • Get Adequate Insurance Cover: The ULIP plans can help you realize your long-term financial goals. These plans also secure your family in case there is a mishappening. So, choose the right life insurance coverage so that your family members are secure when you are not there.
  • Choose an Extended ULIP plan: Since ULIP plans help in the creation of wealth, you must stay invested in it for a long period. ULIPs generally have a lock-in period of five years after which you can withdraw money from it. Moreover, if you stay invested for a long period your wealth will be maximized through the compounded returns.

Conclusion: ULIPs offer you the combination of investment along with life cover so that you can create wealth and keep your family safe in case there is an emergency. So, if you are looking for dual benefits within a single insurance policy, then this is the one that you can buy for yourself. 


FAQs:

 

1) Is ULIP a good investment?

Yes, ULIP is a great investment option for people who want to avail the dual benefits of an investment and an insurance policy.

2) What is the right time to invest in ULIPs?

There is no specific time to invest in ULIPs. But it always advisable to invest early so that you can grow the funds that you have invested to fulfill your financial goals.

3) How can I maximize my ULIP returns?

You can maximize your returns by taking a variety of steps that include starting early, investing at regular intervals, payment of premiums on time, reviewing the investment portfolio after every 6 months, investing in various types of funds, using to-ups to strengthen your investment, and combining the insurance and investment in the right proportion so that you can avail tax benefits.

4) What is the fund value in ULIP?

When you get a ULIP, you can invest in various types of funds depending on your risk tolerance and financial goals. At any given time, the total fund value is the total of monetary value of all the units that you own.

5) What should one keep in mind while investing in ULIP?

You must keep in mind a few simple things when you invest in a ULIP. These include ULIP charges, benefits, fund options to invest in, payment in case of premature surrender, limitations, lapsing and the consequences that you can face, etc.

6) Can I cancel my ULIP plan?

Yes, you can surrender your ULIP plan, but you may have to pay surrender charges and you may also have to let go of some portion of the accumulated returns and the life cover will cease.

7) What is the minimum lock-in period for ULIP?

The minimum lock-in period for ULIP is 5 years.