An Introduction to Unit Linked Investment Plan (ULIP)

Unit Linked Investment Plans or ULIPs are basically goal-based financial investment solutions that provide the dual benefit of investment and protection. In other words, ULIPs offer long-term investment options by providing protection cover and are linked to the capital market to give you the flexibility of investing your units in debt and equity funds as per your risk appetite.

Even though a lot has been written about ULIPs in the past, but the change in its guidelines still compels its users to understand ULIP meaning deeply.

To improve the returns of ULIP and reduce its charges for investors, the Insurance Regulatory and Development Authority of India (IRDAI) has issued new guidelines in the year 2010. Moreover, the main intention of the improvement in these guidelines is to improve the sale of this product as a long-term investment tool. Resultantly, the demand of ULIPs has considerably improved. So, here we are going to give you an overview of ULIP.

ULIP Features:

The list of unique features that ULIP has is as follows:

  • Invest in Multiple Funds: ULIPs give you an option to invest in multiple funds as per your risk profile and requirements.
  • Dual Coverage: With ULIPs you get an opportunity to both invest and insure yourself and your family. In this way, it gives twin advantages of investment and insurance.
  • Tax Benefits: You get the tax benefits under Section 10D and 80C of the Income Tax Act 1961 by investing your money in ULIPs.
  • Transparency: The ULIP investments are completely transparent wherein you know everything about your invested money.

Why is ULIP better than Other Investment Options?

The below-mentioned points for sure explain the reason for selecting ULIP over other investment options:

  • Easy option to switch funds: One of the biggest benefits of investing in ULIPs is you get the freedom of shifting your invested money from one fund to another without changing your long-term investment plan. You can also re-direct your future premium to the fund of your choice without making any changes to the composition of your existing fund. Apart from these options, ULIPs also give you the flexibility of ‘partial withdrawal’ of some amount of money from your accumulated Fund Value before the completion of policy tenure.
  • Easy and Simple Investment Option: With ULIPs, you do not have to manage your stocks every day instead expert fund management is provided. It also provides you with several fund options and gives you an opportunity to choose a fund option wherein your premiums shall be invested.

Advantages of Investing in ULIPs

The benefits that one gets while investing in ULIPs are:

  • ULIP helps to build wealth in long term.
  • You get tax benefits under Section 80C and 10D of the Income Tax Act, 1961 by investing in ULIPs.
  • Switching among the funds is another benefit that you get with ULIP. So with your changing goals and requirements, you can switch the funds for free but only for the fixed number of times. For example, the ICICI Wealth Builder provides seven free switches in a year and SBI eWealth provides zero free switches. So, it depends upon the insurance provider.
  • You can perform partial withdrawal of the funds after completing three years with the policy. However, it also depends upon the pre-specified conditions of your insurance plan.
  • ULIPs provide different investment options such as Conservative ULIPs – wherein up to 20% is invested in equity, Aggressive ULIPs – wherein 80 to 100% is invested in equities and balanced is invested in debt, and Balanced ULIPs – wherein you can invest 40 to 60% in equities.

Disadvantages of Investing in ULIPs:

The common disadvantages that ULIPs of most of the insurance providers have are:

  • The return of the ULIP is not guaranteed or it can be poor.
  • ULIP entirely depends on the share market, thus it is not wise to invest your money in ULIP when the market is fluctuating.
  • ULIP is one of the expensive schemes to put your money in. Apart from your investment in the scheme, a lot of money is taken as a convenience fee, mortality charges, fund management, administrative charges, etc.

Different ULIPs Available in the Market

There are different options present as ULIP schemes in the market. You can select the ones that as per the returns, terms, and risks you can bear.

  • Equity Investments: Under this option, the ULIPs invest in the stock of the companies and high-risk equities. Even though equity investments offer the highest rewards, however, they are for sure the riskiest investments.
  • Cash Funds: Under this investment option, your corpus is directed to the money market funds, bank deposits, cash, and other instruments of the money market. They come under the lowest risk category.
  • Guarantee and Non-Guarantee ULIPs: Guaranteed ULIPs separate investors from risks however the rewards are comparatively lesser. On the other hand, the non-guaranteed ULIPs provide a range of investments and you can select from different risk levels. Despite this investment does not promise anything, but it gives you the opportunity to decide when your money goes and where.
  • Balanced Funds: One of the most stable and prudent ULIP option wherein your investment amount goes to different places. As the name of this option says, it invests your money in proportion and hence divides your total invested amount between high-risk equities and fixed-interest instruments having a lower risk.
  • Single Premium: A plan wherein a lump-sum of the premium is paid at the start of the ULIP, whereas rest of the amount is regularly distributed over the period.

Final Words:

On one hand, you may consider ULIPs as one of the best investment options because they offer dual benefits of both investment and insurance, the other hand you may think them to be expensive. Even though here we have explained all the pros and cons of ULIPs and tried to incorporate all that is required by you to understand this investment scheme, but it is up to you whether you want to invest your money in ULIPs or not.

Things to Consider While Investing in ULIP

Before investing your money in ULIPs, you must consider the following points in mind:

  • Investment Fund Options
  • Applicable Charges
  • Features and Benefits
  • Payment on Pre-mature Surrender
  • Benefits and Features
  • Exclusions and Limitations
  • Lapsing and the Consequences

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December 28, 2018 An Introduction to Unit Linked Investment Plan (ULIP)