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Wednesday, October 4, 2023

How do ULIPs Work, Benefits & Risks of Unit Linked Insurance Plan

The ever evolving financial planning schemes and the quest for greater return has gone so far to force financial institutions to come up with varied smart and safer investment options. ULIP is one such category of smart products that bags multiple benefits in a single investment.

ULIP stands for Unit Linked Insurance Plan, which is a unique blend of Investment and Insurance plan, i.e it is primarily an insurance instrument that offers investment benefits too. In simple terms it provides life cover alongside the benefit of wealth creation.

How Does ULIPs Work?

The diverse benefits of ULIPs are designed with simplicity for seamless and hustle free experience of Investors.

In ULIPs, a policyholder is required to make uniform premium payments, a part of which is utilized to provide life insurance coverage and the remaining part is pooled with the investment received from other policyholders. And finally the pool is invested in financial instruments like equity, mutual funds, and debt aiming to generate returns out of it. Investment in ULIP is seen as a secure way to stay financially prepared against emergencies and multiply your money as well. The investment part of ULIP is structured similarly to that of mutual funds.


ULIP makes Investment easy

ULIP insurance companies have a team of dedicated fund managers who manage your investments, optimizing it for best possible returns on your behalf. The fund managers focus towards reaching a specified investment objectives. An Investor is free to decide the single strategy of investment or the diversified one.

Investors may switch their portfolio between debt and equity based on their risk appetite and knowledge of market’s performance.

The investor is provided with the leverage to switch the type of investment plans during the course of the premium payment which gives a sense of freedom to investors with a flexible environment of decision.

What benefits does ULIP investment have?

  • Life Insurance cover: The primary objective of life security coupled with investment is achieved at ease. The policy holder leaves behind a financial base for his family in case of his unforeseen demise.
  • Tax benefits: The dual Tax deduction under Section 80C at investment time and under Section 10(10D) for returns out of the policy on maturity is a major attraction for financially awakened investors. However, The Central Board of Direct Taxes, Government of India(CBDT) issued guidelines for taxable income calculation if the annual premium of ULIP plan exceeds Rs 2.5 lakh and made it taxable in case annual premium exceeds Rs 2.5 lakh.
  • Compounding Effect: ULIP is an opportunity to harness the market returns because of the allocation of a portion of the premium into market-linked instruments like debt and equity security that too with a compounding effect due to continuous investment.
  • Flexibility & Control over investment : As previously discussed, ULIPS are flexibly designed to allow policy holders to switch their portfolio between debt and equity during the course of premium payment.

Points worth considering before investing in ULIP

Having full knowledge of the investment plans along with the contingencies provisions of the company is crucial for all investors. Hence here we come with few neglected but extremely important points to consider before investing into a policy.

  1. In case of policy holder’s death, the nominee gets any one of the following whichever highest among them:
  • The minimum amount assured, or
  • The current fund value as on that day, or
  • 105 % of the premiums paid till now.
  1. Minimum period of policy is 5 years.
  2. The Lock in the period is of 5 years
  3. In case the policy has been discontinued after 5-years, one may revive it within two years of discontinuation.
  4. Generally the grace period is 15 days for monthly premiums and 30 days in the rest of the cases.
  5. Partial withdrawal can be done after 5 years and in the case of a child policy holder, no withdrawal is allowed until his attainment of 18 years.


No doubt ULIPs are intelligently designed financial schemes for the benefit of policyholders. However it may not suit every investor as everyone has a different need and financial goal. Apart from it a thorough check into the policies of different companies must be done carefully before investing your hard earned money. And needless to say every investment holds a certain risk and so do the ULIPs, hence a proper financial planning is a must. And last but not the least think twice before keeping all your eggs in one basket.

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