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What is ULIP

Know About What is ULIP, ULIP Full Form and how they work for you

#Investments
5:50 min read

ULIP full form is Unit Linked Insurance Plan, which is a multi-faceted life insurance product. A ULIP plan is a combination of life insurance and investment. ULIPs requires you (as a policyholder) to make regular premium payments, part of which is utilised to provide life insurance coverage. The remaining is pooled with the assets received from other policyholders, and then invested in financial instruments (i.e. equity and debt), similar to mutual funds. Let’s know more about what is ULIP and how to invest in them.

What is ULIP Max Life Insurance

What is ULIP Max Life Insurance

How Is ULIP Structured? 

The investment options under ULIP or Unit Linked Investment Plan are structured similar to those of mutual funds.

ULIP plans pool investments from different investors before they are allocated to different fund options based on individual preferences. 

The assets under ULIP plans are managed by dedicated fund managers, whose focus is towards accomplishing specified investment objectives. As an investor, you can buy shares or 'units' in a single strategy or choose to diversify your investments across several market-linked ULIP funds.

When you choose to buy into a ULIP fund, you must first commit an initial lump sum payment. Subsequently, you have to make premium payments towards the plan – annual, semi-annual, or monthly.

The premium payment obligation varies from one ULIP plan to another, as evident through the estimates made through the ULIP calculator. The premium invested in a ULIP plan is proportionally invested towards a specified investment mandate.

However, ULIP plans offer flexibility to investors, who may choose to adjust their fund preferences, depending upon their needs, throughout the investment duration. 

How Does ULIPs Work? 


In a ULIP (ULIP full form – Unit Linked Insurance Plan), the premium amount that you pay is allocated to the funds chosen by you, after the insurance company has deducted certain charges, including –

1) Fund allocation charges

2) Policy administration charges

3) Fund management charges

4) Mortality Charges

As a long-term financial plan, the meaning of ULIP is to provide ample wealth creation opportunities. On the other hand, the ULIP's meaning, as a life insurance product, is to provide more diversified returns in the form of life insurance protection. 

The investments under ULIP plans are managed by dedicated fund managers, appointed by the insurance company. Thus, there is no need to track the investments on your own. If you want, you can track the performance of the individual ULIP fund options and switch between funds (without incurring any additional costs) to maximise the profit and deal with market volatility.

What is ULIP Max Life Insurance

In a ULIP (ULIP full form – Unit Linked Insurance Plan), the premium amount that you pay is allocated to the funds chosen by you, after the insurance company has deducted certain charges, including –

1) Fund allocation charges

2) Policy administration charges

3) Fund management charges

4) Mortality Charges

As a long-term financial plan, the meaning of ULIP is to provide ample wealth creation opportunities. On the other hand, the ULIP's meaning, as a life insurance product, is to provide more diversified returns in the form of life insurance protection. 

The investments under ULIP plans are managed by dedicated fund managers, appointed by the insurance company. Thus, there is no need to track the investments on your own. If you want, you can track the performance of the individual ULIP fund options and switch between funds (without incurring any additional costs) to maximise the profit and deal with market volatility.

What is ULIP Max Life Insurance

Fund Option Under ULIPs 

Some of the most common investment options available under ULIP plans are –

a) Equity Funds 

In an equity fund, the allocated investment amount is used to purchase stocks, which have a Net Asset Value (or NAV) associated with them. NAV is the price per share (or 'unit') in a Fund. Also, investments in equity carry high inherent risk because of market fluctuations. However, equity investments can also be the most rewarding.

b) Debt Funds 

The premium allocated towards debt funds is used to invest in instruments such as Government Bonds, and debentures, which offer a lower risk than equity investments. Compared to equity investments, however, debt funds may offer a lower return on investment.

c) Hybrid or Balanced Funds 

Hybrid or Balanced Funds are designed to provide capital growth (from the equity component) while ensuring lower risk (due to the debt component.) In case of market fluctuations, thus, any loss that you incur from the equity portion is balanced out by the lower risk yet consistent returns from the fund's debt portion. 

Below table enumerates the various aspects of these fund options –

General Description  

Nature of Investments

Risk Category  

Equity Funds  

Primary investments include company stocks that focus on capital appreciation 

High 

Debt Funds

Investments include government securities, corporate bonds, and other fixed-income instruments

Low

Balanced/Hybrid Funds  

Investments combine equity component with fixed interest instruments 

Medium 

 

Also Read: Types of Bonds in India

 

Benefits of ULIPs 

ULIP plans provide you with an opportunity to invest in various market-related securities such as equity, debt, and balanced funds to receive long-term investment returns. You can choose to invest in a variety of fund options, depending upon your risk appetite and investment objectives.

You can also use a ULIP calculator to get an estimate of the premium payable towards the plan and the expected returns – something that will help you better understand 'what is ULIP' and its various advantages. Here are some other benefits of ULIP plans –

1. Market Linked Returns 

ULIPs provide an opportunity to avail of earn market-linked returns by allocating a portion of the premium invested into market-linked instruments such as debt and equity instruments (in varying proportions).

2.Life Protection with Savings

Besides allocating a portion of the premium invested into market-linked instruments, Unit linked Insurance Plans also help protect you and your loved ones against any emergencies in life.

Thus you can avail of market-linked returns, while the ULIP plan takes care of your protection needs.

With the need of protection against life's eventualities out of the way, you can develop a regular habit of saving and investing and build substantial wealth over the long term.

What is ULIP Max Life Insurance

2.Life Protection with Savings

Besides allocating a portion of the premium invested into market-linked instruments, Unit linked Insurance Plans also help protect you and your loved ones against any emergencies in life.

Thus you can avail of market-linked returns, while the ULIP plan takes care of your protection needs.

With the need of protection against life's eventualities out of the way, you can develop a regular habit of saving and investing and build substantial wealth over the long term.

What is ULIP Max Life Insurance

3. Flexibility 

ULIP or Unit Linked Insurance Plans help you achieve your financial objectives by providing the flexibility to –

  • Switch between investment funds based on your changing needs
  • Make partial withdrawals after the completion of the initial 5-year lock-in period
  • Single premium additions to help you invest additional sums of money (alongside the regular premium paid) as and when desired
     

4. Level Paying Premiums  

Under a ULIP plan, all regular premium or limited-term premium payments shall have a uniform or level premium payment structure. Any additional payments of premium are treated as a single premium, to provide life insurance cover.

5. Even Distribution of Charges 

According to IRDAI, the charges levied on ULIP plans are evenly distributed during the 5-year lock-in period, to help ensure that the insurers eliminate the high front-ending of expenses.

6. Tax Benefits

The premium paid towards the ULIP plans is eligible for tax deduction under Section 80C of income tax 1961, up to a maximum of Rs. 1.5 lakh. At the same time, the maturity/death benefit received under the ULIP plan is tax-exempt under Section 10(10D) of the Income Tax Act 1961.

What is ULIP Max Life Insurance

5. Even Distribution of Charges 

According to IRDAI, the charges levied on ULIP plans are evenly distributed during the 5-year lock-in period, to help ensure that the insurers eliminate the high front-ending of expenses.

6. Tax Benefits

The premium paid towards the ULIP plans is eligible for tax deduction under Section 80C of income tax 1961, up to a maximum of Rs. 1.5 lakh. At the same time, the maturity/death benefit received under the ULIP plan is tax-exempt under Section 10(10D) of the Income Tax Act 1961.

What is ULIP Max Life Insurance

Which Investor Class Are ULIPs Most Suited For? 

1. Individuals who want to track their investments closely

A ULIP allows you (as the policyholder) to closely monitor your portfolio. Such individuals may also benefit from the switching flexibility offered by ULIPS, thorough which they can adjust capital allocation between funds options with varying risk-return profiles.

2. Individuals with a Medium to Extended Investment Horizon

ULIPs are ideal for you if you are willing to stay invested for relatively long periods.

3. Individuals with Varying Risk Profiles 

ULIP plans offer a variety of funds options – each with varying risk-return profiles. Thus, investors with different risk profiles (from risk-averse investors to those with healthy risk appetite) can benefit from the choice of funds available.

4. Investors across All Stages of Life 

Different types of ULIP plans are available to help you protect yourself and your loved ones against financial needs and liabilities at specific points in time.

 

How to Choose the Best ULIP Plan? 

Before you invest in a ULIP plan, you must consider comparing and evaluating to choose the best ULIP plan available in India. Following are some of the key points to keep in mind while choosing the best ULIP plan:

· Evaluate Your Goals

· Choose the Right Life Insurance Cover Amount

· Stay Invested for an Extended Investment Tenure

· Avail Maximum Tax Benefits u/s 80C & 10 (10D)

What is ULIP Calculator?

ULIP Calculator is a tool that helps you to compare and evaluate before buying a ULIP plan in India. A ULIP Calculator is a tool which assists in calculating the maturity amount on the basis of the expected future investment value and returns under the ULIP policy. To calculate your possible returns, you just need to provide your details, investment amount (exclusive GST), payment frequency, premium payment term and investment period. The calculator will provide the returns and life insurance cover amount.

Frequently Asked Questions (FAQs)

Q. What is ULIP and How does ULIP Plan Work?

A. ULIP full form is Unit Linked Insurance Plan which is a type of life insurance solution, offered by insurance companies. These plans provide the combined benefits of life cover protection and investment returns.

Unit Linked Insurance Plans provide capital market-linked returns on your investment, by allowing you to invest into a variety of equity and debt fund options.

Q. What should You Keep in Mind While Investing in ULIP? 

A. While investing in ULIP plans, you must keep the following factors in mind –

· Applicable charges including surrender charges (those payable on premature surrender of ULIP plan)

· Investment fund options available

· Features and benefits

· Limitations and exclusions

· Consequences of ULIP plan lapsing

· Other disclosures

Q. How much of the premium paid is used to purchase units?  

A. The entire amount invested under a ULIP plan is not allocated towards buying units. Instead, the insurance company allows the purchase of units only on the portion of the premium remaining once they have deducted the different fees and charges. The quantum of the capital amount received as premium and used to purchase units varies from one ULIP to another.

Overall, the cumulative monetary value of all the units purchased is invariably less than the total amount of premium received, because a portion of the capital is also allocated towards the life insurance coverage component.

Q. Can I seek a refund of premiums if I'm not satisfied with the ULIP policy, after purchasing it? 

A. As a policyholder, you can request a refund of the amount of premium paid within the free-look period, if you disagree with the policy's terms and conditions. In general, there is a 15-day free-look period, which starts once you receive the policy document. On opting for free-look cancellation you will receive the fund value, including charges levied via cancellation of units. The cancellation of units is subject to deduction of expenses towards stamp duty, medical examination, and proportionate risk premium for the coverage period

Q. What is ULIP NAV?

A. ULIP NAV (or Net Asset Value) is defined as the total value of the units holding, after deducting the value of its liabilities. In other words, NAV is calculated after deducting liabilities such as management fees, marketing expenses, and operating expenses.

Sources -

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo758

ARN: Oct/Bg/28D

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