ULIP: Meaning, Full Form, Benefits, & More

ULIP Guide - BimaBandhu

For many individuals who are willing to buy a life insurance policy in India, the mere thought of not getting any returns along with the life coverage is unsatisfactory. Their ideal insurance product is the one that can provide life cover along with additional returns. While investing in the equity market seems quite risky, we all want to invest money in a way that suits our financial profile and helps deal with the market-related risks. This is where ULIP comes into the picture as a popular investment scheme that provides the dual benefit of life insurance and investments. 

Here, we will cover diverse aspects of a ULIP plan to help you understand if it is meant for you.

What is ULIP?

A Unit Linked Insurance Plan, also known as ULIP, is a type of life insurance policy that provides both life cover and investment opportunities to the policyholders. A part of the ULIP premium goes into providing life insurance coverage to the insured while the rest of the amount is invested in the fund of his/her choice. 

In simple terms, ULIP plans are goal-based financial solutions that are linked to the capital market and can provide you with the flexibility to invest in different types of mutual funds as per your risk appetite. You can benefit from capital appreciation over a considerable period while also getting insurance coverage. The life coverage will provide the much-needed financial protection to your loved ones in your absence, while the investment component will help you achieve various financial goals.

How Does a ULIP Work?

A ULIP policy provides life coverage along with returns related to its investment component. Before you choose to invest in ULIP, you must know that you need to bear the investment-related risk. The primary value of ULIP investments is to secure your family financially against any unfortunate event.

Here’s how a ULIP plan works in general:

  • Your ULIP plan premium is divided into two portions, one of which is allocated for life insurance cover.
  • The remaining amount is invested in different equity and debt funds, or a combination of both.
  • The total amount invested in the chosen schemes results in unit allocation based on the fund’s Net Asset Value (NAV). This NAV also reflects the ups and downs in the value of the underlying units.
  • Selling a certain number of units means making a partial withdrawal from the accumulated corpus. 
  • At the time when your policy matures, you can choose to receive the total fund value as a lumpsum or monthly installments payable over a specified period.
  • The fund managers will help you invest the investment component, but it is up to you to select the right funds based on your risk profile.
  • In case of your unfortunate demise during the chosen policy tenure, the death benefit payable to the policy nominee will be either sum assured, total fund value, or a combination of both, depending on the policy terms.

What are the Types of ULIPs?

ULIP plans are classified into different types based on two parameters – fund type and plan structure. The following table covers different types of ULIPs in detail:

Parameter  ULIP Type Description
Fund Type Equity ULIP
  • Primarily invest in equities
  • Suitable for investors having high-risk appetite
  • Invest in debt instruments like corporate bonds, government bonds, etc.
  • Pose low to moderate risk
Balanced Fund ULIP
  • Gives the option to invest in both equity and debt instruments
Liquid Fund ULIP
  • Invests in highly liquid market instruments such as treasury bills
  • Suitable for short-term goals
Cash Fund ULIP
  • Suitable for risk-averse investors
Plan Structure Regular vs. Single Premium ULIP
  • Regular Premium ULIP requires payments to be made regularly until the plan matures
  • One-time payment is needed for single premium ULIP  plans
Guaranteed vs. Non-Guaranteed ULIP
  • Guaranteed ULIP policies provide stable returns over a long time
  • Non-guaranteed ULIPs have the potential for high returns but are also riskier
Life-stage focused ULIP
  • Invest in different instruments based on the age of the policyholder

Benefits of Investing in ULIPs

Unit Linked Insurance Plans are highly beneficial for the policyholders. Some of their key benefits are:

  • Maturity Benefit

If you survive the maturity period of your ULIP policy, you will get the accumulated fund as the survival or maturity benefit. Furthermore, these benefits are tax-exempt under Section 10(10D).

  • Death Benefit

In the event of your untimely demise, the policy nominee will receive the ULIP plan insurance benefit as per the policy terms.

  • Benefit for Long-Term Investments

ULIP plans also allow you to invest in the market instruments for the long term so that you can get good returns on your investment.

  • Partial withdrawal benefit

With ULIPs, you also get the facility to withdraw funds partially for emergencies after a fixed time and up to a certain limit. 

  • Dynamic fund allocation

This helps you benefit from receiving maximum investment returns in case you are less familiar with managing market-linked instruments in your portfolio.

  • Freedom to select life insurance cover

While selecting ULIP plans, you can select the life insurance cover as much as you want based on your income and family’s financial needs.

  • Goal-based investment planning

You can include ULIPs in your investment portfolio as a way to achieve various goals in life, like retirement, child’s higher education, etc.

Key Features of ULIP Plans

ULIP policies are designed with several features that make them one of the most preferred investment options for an investor. These include:

  • Investment and life insurance under one plan

A ULIP policy allows wealth appreciation by investing a part of the premium you pay into different market-linked instruments. Alongside, it provides comprehensive life cover to you and your loved ones during the chosen policy period.

  • Easy to switch between different fund options

Under ULIPs, you get the facility to switch between the equity and debt fund options at any time during the policy term. You can make a certain number of fund switches in a year without paying any additional charges. 

  • Premium redirection facility 

Several ULIP plans allow the investors to redirect premium towards specific fund options based on a certain percentage of premium to be allocated for different funds. For more details on this aspect, you are advised to check the policy document carefully.

  • Partial withdrawals

These types of life insurance policies have an initial lock-in period of five years. However, you can choose to withdraw a certain amount from the accumulated fund value after completing this period. 

Why Should You Invest in ULIPs?

Investing in ULIPs makes sense because of the benefits they offer, some of which are:

  • Optimum returns based on the plan you select and the investment horizon
  • Easy to choose between aggressive or conservative ULIP plans based on your risk profile
  • Tax benefits on the premium paid towards the policy
  • Liquidity in the form of partial withdrawals to deal with financial emergencies

How to Choose the Best ULIP Plans?

Since there are several ULIP products available from different insurers, you must consider the following things while selecting a suitable plan for yourself and your family:

  • Your financial goals

With ULIPs, you get an opportunity to invest money in both equity and debt funds. Since you can expect good returns in the long term from your ULIP investments, you should plan them up based on various goals in life. Analyze the investment horizon to reach different goals in order to decide whether to select an aggressive or conservative plan.

  • Adequate life insurance coverage

Other than the investment side, ULIP also offers a financial safety net for your family in case of your untimely death. This is where selecting the right sum assured is quite important. 

Also Read: All About Sum Assured in Life Insurance

  • Extended investment horizon

Although ULIP has a lock-in period of five years, you can choose to stay invested in the policy for an extended tenure to accumulate more wealth with the power of compounding.

  • Maximum tax savings

Picking the most suitable ULIP plan can enable you to maximize your tax savings under Section 80C and Section 10(10D). So, pick the plan accordingly.

  • Claim Settlement Ratio (CSR) of the life insurer

Last but not least, it is important to consider the CSR of the life insurance company offering ULIPs. The higher this ratio, the more credible an insurer is. 

How to Manage ULIP Funds?

You can manage the chosen ULIPs in the following ways:

Way to manage ULIP Description
Self-switching Allows to manage the fund yourself and change premium allocation as per your risk appetite, goals, and current portfolio
Automatic switching Involves professional fund managers to make switches based on the parameters you select while buying the plan
Investment top-ups Allows you to invest more money into your ULIP plan in addition to the regular premium payable

Which Investor Class is Most Suited for ULIP Investments?

This is just another way of saying – ‘Who should invest in ULIP plans’. The answer is:

  • Investors who are willing to take calculated risks
  • Investors having long-term financial goals
  • Those having an adequate understanding of how the market-linked instruments work

What are ULIP charges?

Before you invest in ULIPs, you must know that there are several charges associated with ULIPs. These are as follows:

ULIP charges Description
Premium allocation charge It is levied against the allocation of funds against different fund options and is expressed as a percentage of ULIP premium.
Fund management charge It is levied as a percentage of the value of assets and is adjusted based on the changing NAV of funds.
Policy administration charge It is levied by each monthly plan anniversary by canceling proportionate units starting from the policy commencement date.
Mortality charge It is meant to compensate the insurance provider if the life expectancy of the policyholder is not met.
Switch charge It is related to fund switches beyond the allowed number of switches that are free.
Surrender or discontinuation charge It is levied on the fund value at the time of discontinuance of policy or surrender. 
Premium redirection charge It is related to redirecting the premiums to different funds beyond the maximum permissible number of premium redirections.
Partial withdrawal charge It is related to partial withdrawals beyond the permissible count under your ULIP plan.


Which ULIP plan is best?

Different ULIPs are suitable for different investors. Hence, it makes sense to compare them in terms of your needs, income, and financial goals.

When is the right time to make ULIP investments?

Since ULIP policies provide long term benefits, you can choose to start investing in them as soon as you start earning a regular income.  

Are ULIPs a good investment?

ULIPs enable you to avail of good returns along with protecting your loved ones under a life insurance plan. This is what makes it a suitable investment for many.

Can I reduce the risk related to the ULIP investments?

You can reallocate the premium into different market instruments to minimize the risk and protect your investments.

What is a ULIP Calculator?

A ULIP calculator is a tool using which you can compare ULIP plans and check the expected returns. It is available online to make it easier for you to perform a ULIP comparison.

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