A Complete Guide to Unit Linked Insurance Plan (ULIP) 

A Guide to ULIP Plans - BimaBandhu

For every individual, living a satisfied life involves fulfilling various financial needs. Other than the regular expenses, we have so many avenues asking for our attention, including life insurance purchase and regular investments. For many people, buying life insurance is yet another regular expense, while there is a lack of money to be invested in different financial instruments on the other hand. ULIP lies at the convergence of these two sides of life – life insurance and investment. 

It is a type of life insurance plan that comprises of both investment and insurance component in it. Let’s dig deeper to understand if buying ULIP plans is suitable for you.  

What is ULIP (Unit Linked Insurance Plan)? 

The acronym ‘ULIP’ stands for Unit Linked Insurance Plans. It is a life insurance cum investment plan which gives you an opportunity life cover along with the opportunity to invest in different funds for wealth creation. In simple words, ULIP is a combination of insurance and investment. A part of the premium you pay for these plans is invested in different components, while the rest is used to provide life insurance coverage. 

ULIP plans came into existence in India in 1971 after being introduced by the Unit Trust of India (UTI). The Life Insurance Corporation then introduced its ULIP offerings in 1989. Initially, high charges were associated with this financial product. However, many private life insurance providers offer new-age ULIP plans with maximum features and minimal charges nowadays. 

Buying a suitable ULIP gives you the flexibility to plan your investments and balance your funds safely into debt and equity components. You also get the option to switch between funds with ULIPs as per the changing market conditions. At the same time, there is a financial safety net safeguarding your life goals and that of your family members in the form of life insurance cover under the chosen ULIP plan.  

Investments in ULIPs are subject to capital market risk. As a policyholder, you need to bear these risks while including these plans into your investment portfolio, along with various charges like fund management charges and allocation charges. Hence, you are advised to make ULIP investments based on your risk appetite and needs. 

You May Also Like to Read: All About Life Insurance in India 

How Does a ULIP Work? 

In Unit Linked plans, a share of the premium you pay goes towards buying life insurance cover for you, while the other share is invested in different fund options you select. You can select these fund options based on your financial goals and risk appetite. In case of your untimely demise, the nominee you have chosen will receive the fund value and/or insurance benefits, whichever is higher, based on the type of plan you have bought. 

As per the amount invested under your ULIP, you will receive ‘units’ having a specific face value. The value of each unit at any specific time is called Net Asset Value (NAV), which also reflects the increase or decrease in the underlying assets’ value.  

Here’s an example to help you better understand the working of a ULIP plan: 

Sumesh, a 35-year-old individual, invests money in a ULIP plan with an annual premium of Rs. 1,00,000 for a period of 20 years. The policy details would be: 

  • Initial sum assured = Rs. 10,00,000 (annual premium x 10) 
  • ULIP charges = Rs. 2500 
  • Total invested amount = Rs. 97500 
  • NAV = Rs. 10 
  • Total units purchased = (97500/10) = 9750 

Partial withdrawal from the corpus accumulated under a ULIP means selling a certain number of units. At the time of maturity, you can either choose to receive the total value of the fund in lumpsum or monthly instalments for a specified period as per the terms of your plan. 

What are the Benefits of ULIP (Unit Linked Insurance Plan)? 

  • Life Cover 

A ULIP is a suitable plan for individuals who want to enjoy the perks of life insurance coverage along with various other benefits like good returns. With a ULIP plan by your side, you will get peace of mind knowing that your life is covered under a plan you can bank upon. 

  • Market-linked Returns 

Since a part of the ULIP premium is invested in funds in varying proportions, you become eligible to earn returns based on the market conditions. You can keep a tab on the returns and switch funds to ensure you get the maximum benefits out of your investments. 

  • Death Benefits 

Under a ULIP, the nominee will receive death benefits in case of your untimely demise during the plan period. The exact value of these benefits is calculated based on the sum assured and the cause of demise.  

  • Maturity Benefits 

In case you endure the policy period, you will be entitled to receive maturity benefits under ULIP as the sum of the fund value.  

  • Withdrawal Benefit 

A ULIP allows you to withdraw a portion of the total invested amount for emergency needs, based on its terms and conditions. Such withdrawals are mostly possible after completing a pre-defined tenure and are tax-free in nature. 

  • Tax Deductions 

The amount you invest in ULIPs makes you eligible for tax deductions and thereby, reduces your income tax liability to the government. 

What are the Income Tax Benefits of Buying ULIP? 

Other than the investment and life insurance benefits, Unit Linked Insurance Plans also offers income tax deduction benefits as defined under Section 80C of the Income Tax Act, 1961. Also, their maturity benefits are tax-exempt or tax-free under Section 10(10D).  

A key point to consider while investing in ULIPs is that the minimum sum assured must be ten times the annual premium payable at least. Otherwise, the tax benefits of ULIP are limited to 10% of the sum assured while the maturity benefits also become taxable. 

How Can You Claim Tax Benefits on a ULIP Plan? 

You can easily claim the tax deductions for your ULIP investments while filing Income Tax Return (ITR).  

How to Choose the Best ULIP Plans in Life? 

The selection of the best ULIP plan requires in-depth research about various parameters. Consider the following pointers while buying a plan: 

  • Analyze your long-term financial goals and select the plan that matches these goals. 
  • In case you do not have any investment goals, you should first list them out and then select a plan that covers both the investment and life insurance objectives.  
  • Compare different ULIP plans in terms of their benefits and features. Then match them with your requirements to zero in on the best ULIP.  
  • Check policy tenure flexibility, which is the lock-in period and the related investment horizon. 
  • Evaluate your risk profile and the importance of financial stability in life before selecting ULIP plans. 
  • Know about different types of charges levied like premium allocation fee, fund management fee, etc. to select the right plan. 
  • Gain a proper understanding of the pros and cons of different ULIP plans before you select any. 
  • Check the plan performance to gauge the returns you can expect in the long run. 
  • Check the solvency ratio of the insurer which should be at least 1.5 as per IRDA guidelines 
  • Ask about the claim settlement ratio of the insurer. 
  • Use an online ULIP calculator. 

What are the Key Features of ULIPs? 

There are several features of ULIPs that make them an attractive investment option for individuals from different walks of life. These include: 

  • Flexibility to switch between funds and withdraw investment amount partially for various milestones in life 
  • Facility to invest an additional amount as top-up over regular ULIP premium 
  • Corpus buildup to secure child’s future 
  • Financial benefits for retirement with investments in different types of underlying funds 

Why Should You Invest in a ULIP? 

As per the basic ULIP definition, you can get dual benefits of insurance and good returns from your investment. For many individuals, this is better than buying the insurance or investing money alone. With ULIPs, you can plan to achieve various goals in life.  

In general, you should invest in ULIP plans to: 

  • Receive good returns based on your risk appetite 
  • Avoid the hassles of managing stocks on your own 
  • Get the benefits of multiple fund options to choose from, including debt, equity, or a combination of both in a suitable ratio 
  • To enjoy the transparency of the plan, charges levied, and the ULIP benefits 
  • To make use of partial withdrawal facility for emergencies or unpredictable events 
  • To benefit from lower surrender charges in case in case you wish to surrender your ULIP plan 

ULIP Investment Checklist: What to Consider Before Investing? 

Buying a ULIP plan involves considering several variants, each having unique features and benefits. This is what makes ULIP investment challenging for many individuals. However, you can simplify the task of selecting a suitable plan by following this comprehensive checklist: 

  • Understand how ULIP works in detail before you plan to invest in it. 
  • Know or ask about the charges levied on buying or exiting any ULIP plan. 
  • Keep your investment goals in mind while selecting a plan that suits your financial health and risk profile. 
  • Check the fund performance for the past few years. 
  • Compare different ULIP plans from the same or different insurers in terms of premium, scheme performance, and additional benefits if any. 

Also Read: What is Claim Settlement Ratio? 

ULIP Eligibility: Who Should Invest in Unit Linked Insurance Plans? 

ULIP is a suitable investment instrument for various classes of investors, including: 

  • Individuals with varying risk appetites (having equity funds for aggressive investors and debt funds for conservative investors) 
  • Individuals having plans for medium to long-term investment 
  • Professional investors who know how to track investments and switch between funds as per market performance 
  • Individuals at different life stages – single, married with no kids, married with kids, nearing retirement 

How Can ULIP Plans Help You Save Money for Your Long-Term Goals? 

In the current uncertain times, investing money in various suitable instruments has become the need of the hour. ULIPs score above many other investment plans because of their returns and life insurance coverage benefits.  

  • ULIP plans have a lock-in period of five years which helps develop the habit of disciplined investments. It also gives the policyholders financial cushion for the long term. 
  • Unit Linked Insurance plans have the potential to generate good returns because of the equity component. 
  • You also get the flexibility to switch between funds during the plan tenure as per your needs and risk tolerance. 

What are the Different Types of ULIP Plans? 

There are two ways in which ULIPs are classified in general: 

Based on Purpose 

  • ULIP plans for retirement  
  • ULIP for wealth creation 
  • ULIP to fund children education 
  • ULIP for healthcare emergencies 

Based on Death Benefits 

  • Type 1 ULIP  
  • Type 2 ULIP 

What are ULIP Funds? 

ULIP funds refer to the array of funds made available to the investors while they choose a ULIP plan. As a potential buyer, you can select these funds based on your investment horizon, financial objectives, and risk profile.  

There are mainly four types of ULIP funds, each of which has a different level of risk and return ratio.  

  • Cash funds or money market funds (low-risk category) 
  • Debt funds (medium risk category) 
  • Balanced or hybrid funds 
  • Equity funds (medium to high-risk category) 

Why Should You Invest in ULIP Plans? 

ULIPs are among the most suitable investment options available in India to investors for the following reasons: 

  • Transparent structure, charges, and features 
  • Easy to switch between ULIP funds 
  • Multiple premium-paying frequencies 
  • In cover option 
  • Multiple funds to choose from 
  • Riders for additional coverage 
  • Tax benefits under Section 80C, Section 10(10D), and 80D 

How to Buy a ULIP Plan – Complete Step-by-Step Guide 

Like any other life insurance plan, you can buy ULIPs online by following a few simple steps, as given below: 

  • Visit the website of the insurer from whom you want to buy a ULIP plan. 
  • Select the plan you want to invest in. 
  • Select the plan tenure and premium payment tenure. 
  • Proceed to make the payment online by selecting a suitable payment mode – monthly, half-yearly, or annually. 

ULIP Plans Vs. Mutual Funds 

While investing in ULIPs, many people compare them with other popular investment instruments – mutual funds. On one hand, ULIPs are meant for getting dual benefits of life cover and investment. While on the other, mutual fund investments are made with the primary intention of creating wealth. Hence, it is important to compare the differences between these two types of financial instruments before making any decision. 

Parameters  ULIP   Mutual Fund 
Basic definition  Investment cum insurance plan  Pure investment product 
Lock-in period  5-years  NA 
Fund Switching Facility  Switching between funds is possible and is not taxed  Switching between the scheme of the same fund is allowed 
Tax benefit  Under Section 80C and 10(10D)  Not also fund schemes offer tax benefits except ELSS 
Applicable charges  Premium allocation charges, administration charges, mortality charges, etc.  Only annual fund maintenance charges 
Loyalty benefits  On long term investments in ULIP plans  No such benefit 
Risk factor  Market-linked risk associated   Market-linked risk associated 

What is ULIP Calculator? 

A ULIP calculator is an online tool that you can easily find on insurance comparison portals or the official website of insurance companies. It has been designed to help potential ULIP buyers understand how the plan premium varies as per chosen life cover and financial objectives.  

In simple words, you can calculate the future value (approximate) of your investments in a ULIP using this calculator. It works based on the inputs, including investment amount, frequency or mode, the total number of investment years, and post-tax annual rate of return. By entering these details, you will get an estimate of the returns you can expect from your ULIP investments. It means using a ULIP calculator helps in making the right investment decisions related to ULIP plans.  

What are Different ULIP Charges? 

ULIP investments do have certain charges linked with them, which are divided into the following categories: 

Charges  Definition 
Premium allocation charges  Expenses incurred by the insurer in issuing the ULIP plan
 
Policy administration charges  Regular charges deducted by the life insurer for expenses incurred to maintain a life insurance policy 
Mortality charges  Expenses borne by the insurer for providing life insurance coverage (deducted per month) 
Surrender charges  Charges levied on account of full or partial encashment of units as per policy terms 
Fund management charges  Charges borne by the insurer for fund management 
Fund switching charges  Charges levied on exercising the facility to switch between different funds under a ULIP plan 
Partial withdrawal charges  Charges levied by the insurer on partial withdrawals as per the terms specified in the plan 
Discontinuance charges  Small fee charged on premature discontinuation of a ULIP plan 

 What is ULIP NAV? 

The Net Asset Value (NAV) of each unit of a ULIP fund on a specific day is more commonly known as ULIP NAV. You can easily check it online in the relevant section on your insurer’s website. 

In other words, ULIP NAV also refers to the assets of the firm minus liabilities. Here, the assets include the market value of the investments held by the insurer’s fund, the value of current assets of the fund, and accrued income if any. Liabilities, on the other hand, include current liabilities, service tax, fund management charges, and more. 

Also, ULIP NAV varies from one ULIP plan to another as it is based on the underlying fund’s performance and market conditions. 

Common myths related to ULIP plans are: 

The truth says that IRDA has regulated several charges related to ULIP investments. It includes a reduction in annual charges and capping of fund management charges at 1.35%. 

2. ULIP plans are risky instruments 

This is not true as ULIP gives you the option to invest in debt, equity, or a mixture of both. You can select the funds as per your risk appetite. 

3. Surplus investments are not allowed in ULIPs 

ULIP plans do allow you to invest surplus funds as top-up premiums during the existing plan tenure. 

4. ULIPs cannot be discontinued 

The truth is – you can discontinue your ULIP plan after serving the lock-in period and paying the related discontinuation charges. 

5. Market conditions have an impact on the life cover 

Life insurance cover you receive with a ULIP plan remains unaffected by market conditions. In case the insured dies during the plan tenure, the insurer pays either the complete life cover or fund value, whichever is higher. 

6. ULIPs do not offer other insurance benefits 

Along with the basic benefits of ULIPs, you can add riders for the accidental death benefit, hospital cash benefits, and others for additional advantages.  

Life Insurance Company 

ULIP Plans 

Bajaj Allianz Life Insurance Company Ltd. 
  • Bajaj Allianz Principal Gain 
  • Bajaj Allianz Fortune Gain 
  • Bajaj Allianz Future Gain 
Aviva Life Insurance Company India Ltd.  
  • Aviva I-Growth 
  • Aviva Live Smart Plan 
Pramerica Life Insurance Company Ltd. 
  • Pramerica Smart Life Wealth Plus 
Exide Life Insurance Company Ltd.  
  • Exide Life Prospering Life Plus 
  • Exide Life Smart Future Insurance Plan 
Edelweiss Tokio Life Insurance 
  • Edelweiss Tokio Wealth Accumulation 
  • Edelweiss Tokio Wealth Enhancement Ace 
Future Generali India Life Insurance Company Ltd. 
  • Future Generali Pramukh Nivesh 
HDFC Standard Life Insurance Company 
  • HDFC Life Click2Invest ULIP 
Kotak Life Insurance Ltd.  
  • Kotak Ace Investment Plan 
  • Kotak Wealth Insurance 
IndiaFirst Life Insurance 
  • IndiaFirst Smart Save Plan 
Max Life Insurance Company Ltd.  
  • Max Life Fast Track Super Plan 
PNB MetLife India Insurance Company Ltd.  
  • PNB MetLife Dhan Samriddhi 
  • PNB MetLife Easy Super 
  • PNB MetLife Smart Platinum 
  • PNB MetLife Smart One 
Reliance Nippon Life Insurance Company Ltd.  
  • Reliance Classic Plan II 
  • Reliance Pay Five Plan 

**Disclaimer: Insuropedia does not endorse, recommend, or rate any specific life insurance product or company. Hence, the reader’s discretion is advised.  

ULIP FAQs 

  • What is the full form of ULIP? 

ULIP means Unit Linked Insurance Plan. 

  • What is sum assured in a ULIP plan? 

It refers to the amount that the insurer agrees to pay to the plan nominee in case the insured passes away during the policy period. 

  • What is fund value in ULIPs? 

The value of your outstanding investment after deducting all the related charges is known as fund value. 

  • Are ULIPs and SIP the same thing? 

ULIP is a life insurance product, while SIP or Systematic Investment Plan is a method to invest in mutual funds. 

  • Are ULIP plans taxable at maturity? 

The money you will receive on the plan maturity is tax-exempt u/s 10 D. 

  • Is any taxes or charges levied on surrendering ULIPs? 

Surrendering a ULIP earlier than the lock-in period of five years implies losses in the form of different charges levied by the insurer. 

  • Is ULIP interest taxable? 

The interest you earn on ULIP plans is tax-free. 

  • What will happen if I discontinue my ULIP plan after five years? 

It will lead to immediate plan termination and you will receive the accumulated policy fund amount till the date of discontinuation. There will be no surrender charges. 

  • Can I return my ULIP plan on making the wrong choice? 

You can return the ULIP to the insurer during the free-look period of 15 days.  

  • Are ULIPs riskier instruments? 

Before you invest in a ULIP, you need to understand that the returns will be linked to market-related uncertainties. But you can reduce the risk factor by considering your financial profile while selecting a ULIP. 

 

1 Shares:
You May Also Like