Unit Linked Insurance Plans were designed to ensure you get something in return for the premium paid. ULIPs are insurance plans that also offer a return on investment, unlike regular insurance plans.
In Unit Linked Insurance Plans, two types of benefits are payable; 1) Death or survival benefits and 2) accumulated cash or investment benefits. These benefits are expected based on the sum assured or the value of units, which is dependent on the performance of its investment portfolio.
ULIPs have two components, 1) Mortality expenses and 2) Savings like an endowment policy. The mortality expenses are used to provide assurance cover on life, whereas the saving part is invested in a portfolio of securities per the policyholder’s choice.
The policyholder is not regularly involved with the investment tracking, as it is taken care of by fund managers in the insurance company. It even enables a policyholder to switch between debt and equity-based funds. It is important to note that ULIPs may have a lock-in period of three to five years. Please check the policy document and its fine print.
Features of Unit Linked Insurance Plan
Insurance and Savings
With this single plan, you get an insurance instrument and an investment tool. You will pay premiums for a single plan but get the benefits of an insurance and investment plan.
Like any other insurance policy, the ULIP generates death benefits at the policyholder’s demise. Therefore, the value of the fund and other benefits coupled with the sum assured may vary based on the time of the death.
The insurance company will provide maturity benefits if the policyholder survives the policy period. In addition, some add-on benefits could also be offered per the insurance policy’s terms and conditions.
The ULIP allows you to invest in different investment products and will enable you to earn returns based on the investment fund. In addition, you can use ULIP NAV’s data to track investment returns.
As the investment made under the ULIP is subject to market volatility, long-term tenures are better than short-term. This is because when you keep your money invested for the longer term, you get more time to manage the market volatility.
ULIP investments are eligible for tax benefits under sections 80C and 10(10D) of the Indian Income Tax Act. You can avail of tax exemption up to ₹ 1.50 Lakh as per section 80C on the insurance premiums. The maturity benefits generated under this plan are tax-exempt U/s 10(10D). However, it is subject to the fulfillment of certain conditions.
Categorizations based on Investment Objectives
The Unit Linked Insurance Plans are classified into the following four types based on their end objectives. These are:-
ULIP for Wealth Accumulation
The premiums accumulate over the policy term and help generate wealth. Investing with no or fewer withdrawals for a longer time helps get a sizable investment corpus. Options to choose investment fund help in accumulation as per desired growth rate. Equity-oriented funds may provide higher returns compared to balanced or debt funds. Investment funds should be selected as per age, risk profile, and financial goals.
ULIP for Children’s Education
An insured pays the premiums and get the benefits in small amounts for the requirement of your children. Periodic withdrawal from the accumulated corpus could meet the needs of family and children’s education.
ULIP for Health Insurance and Benefits
A ULIP could be used for providing health expenses. Although a pure health insurance plan may serve this purpose better, a ULIP will give access to accumulated investments that could be used to meet medical expenses or emergencies. Few insurance companies offer Unit Linked Health Insurance plans also.
ULIP for Retirement Planning
An insured pays the premiums during employment and benefits through annuities after retirement. A ULIP plan is an efficient way of providing insurance coverage and retirement planning. It allows flexibility in choosing an investment fund per a person’s risk profile, i.e., a debt fund could be selected when a person approaches retirement age.
Categorization based on Investment Funds
ULIP policies could be categorized on investment fund types: –
In this amount is invested in equity shares of different companies. Equity investments are riskier than debt securities and are subject to market fluctuations. But they have the potential for growth over a more extended period. Therefore, an equity fund should be selected considering age and risk appetite.
Under these Unit Linked Insurance Plans, the funds are invested in debt instruments such as debentures, corporate bonds, and government bonds. While these instruments carry medium to low risk, their returns are only moderate.
To lower the risk factor, some ULIPs invest in a mix of both equity and debt instruments. As a result, the risk is effectively spread across high-risk and low-risk investment options by allocating one part of the funds to equity and the other to fixed-income debt instruments. As a result, the returns offered by balanced funds are more stable and much less volatile than those obtained from pure equity funds.
Guaranteed and Non-Guaranteed ULIPs
The primary focus of guaranteed ULIPs is capital preservation. These ULIP plans limit your exposure to market risk by investing only a small portion of your premium in equity. As a result, guaranteed ULIPs are ideal options for people looking for stable returns over an extended period.
On the other hand, non-guaranteed ULIPs focus on maximizing wealth creation by allowing you to invest a more significant proportion of your premium in equity markets. The returns that non-guaranteed ULIPs offer is higher but more volatile.
Conclusion: Pick the Right Unit Linked Insurance Plan
The insurance industry has changed a lot over the last decade. As a result, it has become more complex and confusing to pick the right insurance plan for you. When choosing an insurance plan, you must consider factors like your risk profile and life expectancy.
Investors looking for capital growth over a long period and insurance cover in one product may choose a unit-linked insurance plan.