Introduction to ULIPs (Unit Linked Insurance Plans)

ULIP stands for Unit linked insurance plan, it’s basically a blend of insurance and investment. In this case, a policyholder can pay premium monthly or annually. The policyholder has to bear the investment risk in a portfolio. ULIP products does not provide any liquidity during the first five years of the contract. The policyholder will not be able to surrender/withdraw the money invested in the linked insurance products either partially or completely till the end of the fifth year. They are essentially a wealth producing aid that can help us in fulfilling our monetary goals keeping in mind a medium to long-term horizon. The premium paid for a ULIP consists of two components; one part is issued for life coverage while the balance proportion is allocated towards investment in instruments such as equities and bonds. So, ULIPs provides us both protection as well as stable savings combined with the flexibility to invest in either an equity or a debt based fund portfolio depending on our risk appetite. ULIPs fundamentally work like a Mutual Funds with an additional life cover in it.

Lock-in-period: It is refers to the specified time period in which the policyholder is restricted from exiting the policy. Every Tax-saving investment has pre-determined lock-in-period; In case of ULIPs, lock-in-period is 5 years.

Switching option: The policy owner has the option to switch funds (for example, from a fund with low returns, to one that performs well) according to their monetary goals and market conditions. Most plans provide a limited number of yearly free-of-cost switches.

Guaranteed surrender value:  Guaranteed surrender value is the amount the insurer pays to the policyholder on policy surrender. This amount is mentioned in the brochure and varies across insurers. Generally, a policy acquires a surrender value only after you have continuously paid the premiums for at least 3 years. It is a pre-defined percentage of the premiums paid, excluding the premium for the first year.

Types of ULIPs:

Based on the chosen asset allocation:

a) Equity Market linked plans: This plans involves high risks but at the same time offers high reward. These ULIPs invest fundamentally in high-risk equities and stocks of companies. Risk category involves Medium to high risk. If you win here gain will be huge.

b) Income, fixed-interest, and bond funds: Here the funds are invested in government securities, fixed-income securities, corporate bonds etc. The risk factor in these investments is moderate hence they provide moderate to low returns.

c) Cash Funds: Investments in these ULIPs will see your compilation directed towards money market funds, cash and bank deposits and other money market instruments. The investments are made in short-term market instruments. The maturity time of these funds is nominal, which is why they are used for short-term money plans.

d) Balanced Funds: These are the most stable and prudent investment based on the very fact that they vary the amount of investment that goes to different places. In this type, the sum is investested in proportions between equity and debt. Thus, lowering the risk factors.

Based on the investment objectives:

a) To fund your child’s education: It is one of the most common reason for choosing ULIP as it aims to provide financial support to cover the expenses related to your child’s education. This ULIPs pay out benefits once a year, when it is needed for the specific purpose for which it was taken.

b) To build a corpus of funds: Idle savings can be put to work through investment plans, and one that also gives you the option of life insurance cover. People let insurance companies manage their funds, instead of finding right investment at the right interest rate for right tenure. Building a corpus is a long time process.

Based on availability of wealth creation:

a) Life stage based / non-life stage based: These plans consider themselves to be your financial aides, and vary your investments between different levels of risk as you age. Investments will be rolled between equity & debt instruments in different proportions at different times.

b) Guarantee / non-guarantee: Guaranteed ULIPs also separate the investor from any kind of risk, although the reward is slightly lesser. Non-guaranteed ULIPs offer a range of investment to choose from, ranging between varying levels of risk.

c) Single premium / regular premium: Everyone has their own premium paying capacity. Single premium plans require one lump sum payment of premium to be paid at the start of the plan, and regular premium plans divide and stagger the premium payments over regular intervals.

d) To plan for retirement: In this type of ULIP, they offer regular pay-outs after the plan ends and you will keep on receiving an amount that can keep you comfortable. It is when these payments start that you will realize the benefit of working for money, and having money work for you.

e) To meet medical or personal emergencies: Medical emergencies, accidents, legal fees, settlement amounts, debt, etc. are huge unavoidable expenses that we bear. There are plans that help you accumulate and use it as you would in a health insurance policy.


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