What is ULIP? Everything You Need To Know About Unit Linked Investment Plan

Posted by Rashmi Dey on May 25th, 2022

Many of you have experienced the sudden inflation rise and cost of living post-pandemic which makes you think are we making the best use of our income? 

As many people look to save money in the future, they don\'t have enough savings to use for the long term. Here is where ULIP comes into play. 

ULIP refers to the Unit Link Investment Plan which is a mix of insurance and investment. ULIP comes with a different plan that enables you to manage the flexibility of your funds but also provides benefits of protection against risks.

In other words, Unit link investment plan gives you a dual facility to provide wealth creation along with life cover.

Hence, it is extremely important to know everything about ULIP before investing in these plans. 

In this blog, you will get everything about ULIP, it\'s functioning and its benefits.

What is ULIP?

ULIP or Unit Linked Investment Plan is the merger of insurance and investment. ULIP is coined by an investor with an aim of providing coverage for beneficiaries.

In this plan, the insurer contributes a portion of his investment towards insurance cover and the remaining amount into investment funds such as equity, debt funds or hybrid funds.

Fund managers are allocated to these insurers who can track and manage these investments on their behalf. Nowadays, many investors use ULIP to fulfil their long term goals such as education, retirement planning, marriage etc.

A ULIP plan\'s assets are managed to a defined goal, similar to mutual funds. The plan determines a net asset value before becoming market-linked and expanding in value. 

Thus when an investor buys units in a ULIP, he or she is buying them alongside a group of other investors.

Investors have the option of purchasing shares in a single strategy or diversifying their portfolio across various market-linked Unit-linked Insurance Plans.

How Does ULIP Work?

Unit Linked Investment Plans is a combination of investment and insurance which provide the benefit of investment and insurance in one go.

These plans provide good stock trading returns with life insurance coverage. You only need to pay a regular premium which is then adjusted for the relevant charges.

The total premium will then be invested in a fund for better returns. You may experience your return growth through NAV or Net Asset Value.

The fund value is paid at maturity. In the event of death, the chosen choice pays the higher of the Sum Assured guaranteed or Base premium fund value + Top-up sum assured or Top-up premium fund value if any.

Because a major portion of the premium is spent on plan expenses during the first few years of a plan, the fund\'s value will initially be below. 

After that, the premium is split into two sections: investment and insurance. Units are granted in exchange for the amount invested in a fund of your choice, which can be debt, equity, or a mix of the two.

The performance of the original fund is used to determine unit allocation.

Types of ULIPs

There are different types of ULIPs available, which can be mentioned below:

How Safe are Unit Linked Insurance Plans?

Many investors believe that these programmes are high-risk investments. This is not the case, however. ULIPs give investors control over the risk they take.

They can take a bigger risk and invest in equity-based funds if they want to get more out of ULIPs. Investors who don\'t want to take high risks can choose debt-based funds.

There are several possibilities for redirecting funds. As a result, the risk associated with this policy is determined by an investor\'s risk appetite.

Benefits of Investing in ULIP

1. Market Linked Returns

A ULIP is a product that allows you to earn market-linked returns by investing a portion of your premium in market-linked securities like debt and equities (in varying proportions).

 2. Life Protection with Savings

Unit linked Insurance Plans (ULIP full form) help safeguard you and your loved ones against life\'s unexpected events by assigning a portion of the premium to market-linked products.

As a result, you can benefit from market-linked profits while having your protection needs to be met by a ULIP plan.

With the need for protection against life\'s unforeseen events taken care of, you can create a regular saving and investing habit and accumulate substantial wealth over time with ULIP plans.

3. Flexibility

ULIPs, or Unit Linked Insurance Plans (ULIP full form), helps you finding your goals which includes: 

• Change investing funds according to your changing demands.

• After the initial 5-year lock-in period has expired, you make partial withdrawals. 

• Single premium additions allow you to invest more funds (in addition to the normal premium) as and when needed.

4. Even Distribution of Charges

According to IRDAI, the charges assessed on ULIP plans are evenly spread during the 5-year lock-in term in order to help insurers avoid significant upfront expenses. Before investing your money, make sure you understand what ULIP plan charges you will be paying.

5. Tax Benefits

The premiums paid towards ULIP plans are tax-deductible up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act of 1961. At the same time, the ULIP plan\'s maturity/death benefit is tax-free under Section 10(10D) of the Income Tax Act 1961.

What is the Lock-In Period of ULIP?

Post-2010, the Regulatory and Development Authority of India has increased from 3 years to 5 years. However, if an investor wishes to see a significant return on his or her investment, he or she must wait 10 to 15 years.

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