What is a Unit Linked Insurance Plan, Types & Benefits

What is ULIP?

Insurance plans are meant to provide financial security to you so that in case of premature demise, your family does not face any financial trouble. Though insurance plans provide unmatched financial security, many individuals also seek good investment returns on their premiums. Keeping this sentiment in mind, ULIPs were launched in the year 2000 when private life insurers were also allowed to operate in the insurance domain. Today, ULIPs have become quite popular, and insurance companies are offering different types of ULIPs to their customers. Let’s understand ULIP meaning in detail and its benefits –

What is a ULIP plan?

ULIP’s full form is Unit Linked Insurance Plan. A ULIP is an investment-oriented life insurance plan. The plan gives you the dual benefits of investment returns and insurance coverage. The premiums that you pay for the plan are invested in market-linked investment funds, which offer attractive growth. Returns under ULIPs are, therefore, not guaranteed but can be attractive if given time.

How do ULIPs work?

ULIPs are considered to be a transparent insurance plan as the premiums you pay, and the growth can be easily monitored. When you buy a ULIP, you can decide the amount of premium you wish to pay (provided it is at least the minimum required premium under the plan). The sum assured is then calculated based on the amount of premium paid.

• ULIPs have different kinds of investment funds which include the following –
• Equity fund wherein at least 65% of the portfolio is invested in equity-oriented securities
• Debt fund wherein at least 65% of the portfolio is invested in debt-oriented securities
• Balanced fund which combines both equity and debt investments for moderate risks and moderate returns

You can choose one or more of these investment funds as per your risk appetite. After that, relevant charges are deducted from the premium, and the premium is directed towards the selected fund. As the value of the underlying assets grows, the value of the fund grows. Your investment in the fund also grows, and you get market-linked returns. ULIPs also provide you with various flexible benefits which are as follows –

Switching – under switching, you can change the investment funds if your investment preference has changed

Partial withdrawal – you are allowed the flexibility of withdrawing from your fund value partially after the first five years of the policy have expired

• Top-ups – additional investments can be done towards the plan through top-up premiums
• Premium redirection – you can choose to redirect your subsequent premiums to another fund from the next policy year under this facility

Surrender of the plan – if the first five years of the policy have been completed, you can surrender your policy to terminate the coverage before the chosen term. When the policy is surrendered, the available fund value is paid as surrender value, and the plan is terminated.

• Benefits payable under ULIPs
• Under most unit-linked plans, you get either a death benefit or a maturity benefit. These benefits are as follows –

Death benefit – the death benefit is higher of the available fund value as on the date of death or the sum assured. If the fund value is higher than the sum assured, the fund value is paid otherwise, the sum assured is paid.

Maturity benefit – when the term of the plan comes to an end, the fund value is paid as maturity benefit. The maturity benefit can be taken in a lump sum, or you can also avail the benefit in instalments over the next five years through the settlement option feature, which is available under most unit-linked plans.

Types of ULIPs

Though ULIPs are aimed at creating wealth, there are different types of ULIPs based on the financial goal that they fulfil. These types include the following –

Investment ULIPs

Investment ULIPs are the most common unit-linked plans which aim to create wealth over the term of the policy.

Child ULIPs

Child ULIPs are especially designed unit-linked plans for the financial security of the child if the parent is not around. Under these plans, the parent is insured while the child is the beneficiary. These plans have an inbuilt premium waiver rider. If the parent dies during the policy tenure, the death benefit is paid. However, the plan does not terminate. The policy continues, and future premiums are paid by the company on behalf of the insured parent. On maturity of the policy, the fund value is again paid as the maturity benefit which provides the child with the financial corpus needed to pursue his/her dreams.

Pension ULIPs

These are other specific unit-linked plans which help in creating a retirement fund. Pension ULIPs are deferred annuity plans wherein you pay premiums during the policy tenure to build up a retirement corpus. In case of death, the death benefit is paid. However, if the policy matures, pension ULIPs allow you to receive annuity pay-outs from the corpus created or defer the vesting age from which you would receive an annuity, or withdraw 1/3rd of the corpus in cash and use the remaining fund value to receive annuity payments. Thus, pension ULIPs create a source of income after retirement and are suitable for individuals looking to fulfil their retirement planning needs.

• Benefits of ULIP
• A ULIP is popular because of the following benefits it provides –
• It allows you to avail insurance coverage as well as investment returns in a single product
• The premiums paid and the benefits received under ULIPs are completely tax-free in nature helping you save tax
• The flexible benefits of ULIPs allow you to manage your investments as per your investment strategy
• The different types of ULIPs help you fulfil the various financial goals that you might have
• Switching and partial withdrawals do not attract any tax making ULIPs tax efficient
• Since the returns are market-linked, you get inflation-adjusted returns from ULIP

ULIPs are attractive insurance policies that give you coverage as well as returns. Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.