Table of Contents
Keywords: Best Savings Plan, Unit Linked Insurance Plan
A Unit Linked Insurance Plan provides the dual benefit of insurance to provide financial coverage to the beneficiaries in case of any unfortunate demise, & the rest is invested in the funds of your choice. This dual benefit helps provide financial security along with growth, which makes ULIP an attractive choice for policyholders who are seeking a financial solution for their funds. These funds offer flexibility in making payments towards premiums & allocation of funds, where you can customise the plan as per your financial goals & risk tolerance.
Different Types of ULIP
Provided are the different Unit Linked Insurance Plan types:
- Based on Fund Options
- Equity-Based ULIP Funds
In this type of plan, the premium amount is used to buy equities of different companies. These funds are riskier as they are market-linked plans, hence yielding higher returns in the long run.
- Hybrid or Balanced Funds
These types of plans are a combination of equities & fixed-interest instruments. These plans are best suited for medium-risk investors, hence providing adequate market exposure.
- Debt-Based ULIP Funds
These funds are suitable for low to medium-risk investors, i.e. conservative investors. These include investments in debt funds, i.e. corporate bonds & government securities, hence providing lower returns in comparison to equity or balanced funds.
- Cash Funds
These are also known as money market funds & are considered to be low-risk investments.
- Based on Purpose:
- ULIP Plans for Wealth Creation
These plans are meant to create wealth with the help of market-linked investments to meet financial objectives & expenses, which cannot be accomplished with routine expenses.
- ULIP Plans for Children’s Education
These plans are also meant for children’s education, aligning the investment & goals. It also allows you to make partial withdrawals once the 5-year lock-in period has been completed, which can be used for tuition fee payments, higher education, etc.
- ULIP Plans for Health Benefits
These plans can also be used for medical emergencies as well. Also, one can add riders to the plan at an added cost.
- ULIP Plans for Retirement
One can also make long-term investments in retirement plans, which will reap benefits post-retirement & also allow handling financial emergencies in case of no regular income.
How Does ULIP Works?
A Unit Linked Insurance Plan is a combination of insurance & investment, where a part of the premium is allocated towards life coverage, & the remaining part is invested in the selected funds. Some of the attributes of ULIP are:
- ULIPs are the Best Savings Plan that provides the combined benefits of insurance & investments.
- A part of the premium is allocated towards providing insurance benefits, & the remaining one is invested in the funds chosen according to the investment & risk.
- The investment component is linked to the performance of the funds, such as Mid-cap, debt funds, large-cap, or balanced funds. Hence, in case their value rises, the value of ULIP also increases & vice versa.
- Also, the investors have the flexibility to switch between funds depending on their performance & market conditions.
Let us now understand how ULIP works with the help of an example:
Mr Aman buys a ULIP at 30 years of age, having a 30-year policy tenure. The premium amount is partially allocated towards the life insurance, amounting to INR 1 crore, & the remaining is invested towards equity. There exist two cases, as mentioned under:
Case 1: In case Aman dies at the age of 45 years due to an accident:
In this case, his family members will receive the amount higher of the two, i.e., a death benefit of INR 1 crore or the fund value at the time of his demise, ensuring the beneficiaries get the maximum benefit possible.
Case 2: In case Aman survives the 30-year policy tenure:
In this case, Aman will receive the fund value that would have been accumulated depending on the fund’s performance, which will further help you achieve financial objectives.
Benefits of a ULIP
Provided below are some of the benefits of a ULIP:
- Dual Benefits
ULIP offers dual benefits of investment & insurance under a single plan. A single premium amount is allocated partially towards investment & the remaining towards insurance, ensuring financial planning.
- Flexibility
As it offers a choice to customise the plan according to the financial goals & risk tolerance level, one can choose to switch between the funds, i.e. equity to debt. Along with this, ULIPs also provide flexibility in the premium payment tenures, such as monthly, quarterly, half-yearly, or annually.
- Liquidity
ULIP also provides an option for partial withdrawal, i.e., you can withdraw some part of the funds invested in you. It helps to cater to immediate expenses like children’s education, marriage, plan vacations, or emergency situations, if any.
- Goal-Based Planning
These plans help you achieve financial goals like children’s education, marriage, retirement planning, wealth growth & creation, etc.
- Tax Benefits
Get a tax deduction for the premium payment under section 80C, & the maturity amount received is exempt from tax.
Who Should Invest in ULIP?
Provided below is the list of individuals who should plan to invest in ULIP:
- Individuals with a medium to long-term investment horizon
These investments are linked with the market, offering high returns over a longer period of time.
- Individuals with varying risk profiles
One can invest either in debt or equity, making ULIPs suitable for low & high-risk investors.
- Investors across all life stages
It is suitable for investors who have financial goals at each milestone of life.
Conclusion
Unit-linked investment plans are, in a nutshell, a combination of an investment & a term plan that offers market-linked returns on the maturity date of the amount invested. This amount would be received by the nominee in case the policyholder dies before the maturity date of the policy. With ULIPs, one can allocate a portion of the premium towards insurance & the rest of it towards investment in funds selected.