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Unit Linked Insurance Plan

Last Updated 27th Nov 2021

  • Unit Linked Insurance Plan is a fusion of an insurance plan and an investment plan.
  • The premium under ULIP is divided into insurance cover and investment funds.
  • Investments are pooled in equity funds, debts funds and balanced funds.
  • ULIP provides maturity benefits if the policyholder outlives the policy period and death benefits if the policyholder perishes before the policy period ends.
  • The level of risk is high as ULIP investments are subject to market turmoil.
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What is ULIP?

ULIP stands for Unit Linked Insurance Plan. It is a merger between insurance and investment. One unit or portion of the premium pays for life insurance cover, and the other portion gets invested in equity, debt or hybrid funds. Investors get to choose the fund they want to invest in. Moreover, the funds can be switched from equity to debt or vice versa at any point in the policy period without attracting any charges. By opting for this plan, you stay insured against the uncertainties of life and continue to invest your hard-earned money. You can pay the premium on a monthly or yearly basis. Since the investment made under the plan is subject to market turmoil, you must have a risk appetite.

Since the ULIP plan was introduced in 1971, most investors hesitated before investing under this plan due to the high charges that come along with it. ULIP did not gain its popularity until 2018. In that year, the Union Ministry relaunched long-term capital gain tax on equity and equity-linked mutual funds. It led a huge number of insurance providers to start offering ULIP as an alternative to equity-linked mutual funds. If you are wondering whether ULIP is suitable for you or not, here is everything you need to know about the plan.

How to choose the best ULIP Policy?

Many leading insurance companies have now included ULIP in their products. Hence, there is a wide range of options for you. Here are a few things that you should take into account while you choose the best ULIP plans.

  • Identify insurance goals: The primary purpose of getting a life insurance plan is to ensure assistance during the hours of need. While selecting any insurance plan, you should keep the requirements of your own and your dependents in mind. Select the ULIP plan that will cover your medical requirements and provide for your dependents in your absence.
  • Identify investment goal: The goal behind any investment may be higher education, a child’s marriage or post-retirement requirements. The investment goal should be the major factor while investing in any plan. Choose the plan that suits your financial goals, be it long-term or short-term.
  • Compare plans: The various ULIP plans come with different features and benefits. To find out which one is the most suitable for you, you must compare the available plans based on their features, the sum assured and so on.
  • Assess the risk factors: The risk level of the ULIP plans is generally on the higher side. Hence, while ULIP is a good option for those willing to take risks, it is not the right choice for those who want financial stability.
  • Flexibility: Make sure that the company you are opting for provides flexibility in terms of the policy tenure and investment options. If the investment provider has a flexible tenure, you can select a tenure apt for your investment goal. The same rule applies to investments. If the investment company offers multiple options like equity, debt and hybrid, you can select one based on your risk appetite.
  • Performance: The better the performance, the more trustworthy is the company. Evaluate the performance of the ULIP providing companies based on the following parameters and select the most reliable one.
  • Claim settlement ratio: This ratio shows the number of claims a company has resolved in comparison to the number of claims that have been made. A higher ratio suggests the expertise of the company in settling claims.
  • Solvency ratio: Solvency ratio shows the financial ability of an insurance company in paying up claims. Hence, an insurance company with a higher solvency ratio is reliable.

Benefits of ULIP Plan

Below laid out are the set of benefits that are provided under the Unit Linked Insurance Plan.

  • Insurance and savings: With this single plan, you get an insurance instrument as well as an investment tool. You will pay premiums for a single plan but get the benefits of an insurance plan and investment plan.
  • Market-based returns: The ULIP allows you to invest in different market tools and thus allows you to earn interest based on the market. You can use the data of ULIP NAV to keep track of your investments.
  • Death benefits: Like any other insurance policy, the ULIP generates death benefits at the demise of the policyholder. The value of the fund and other benefits that come coupled with the sum assured may vary based on the cause of the death.
  • Maturity benefits: In case the policyholder survives the policy period, the insurance company will provide maturity benefits. Add-on benefits are offered as well based on the terms of the insurer.
  • Long-term benefits:As the investment made under the ULIP is subject to market volatility, long-term tenures are proven to be a better option than short-term tenures. When you keep your money invested for the long run, you get more time to manage the market volatility and earn more interest.

How do ULIPs Work?

The premiums you pay under a Unity Linked Insurance Plan gets divided into your insurance cover and your investment tools. You can select any investment tool such as equity or debt funds. The insurer will generate your units as tokens of your investment. The units can be monitored via the ULIP NAV declared by the insurer. The beneficiaries receive the sum insured or the fund value, whichever is the greater amount as either death benefit or as maturity benefit.

Here goes an illustration for a better understanding of how ULIP functions.

The sum assured = yearly premiums (₹ 1,00,000) * 10= ₹ 10,00,000

Relevant charges = ₹ 5,000

Total annual investment = yearly premium (₹ 1,00,000) - relevant charges (₹ 5,000) =₹ 95,000

NAV value = 10

Purchased units = (₹ 95,000/10) = ₹ 9,500

How to Avail Tax benefit on Unit Linked Insurance Plan?

ULIP investments are eligible for tax benefits under section 80C and 10(10D) of the Indian Income Tax Act. You can avail tax exemption up to ₹ 1.50 Lakh as per section 80C. The maturity benefits generated under this plan are tax-free as well. However, if the sum assured is not 10 times the yearly premium, maturity benefits are taxed at a rate of 10% of the sum assured.

Why to invest in a ULIP plan?

The key feature of ULIP is the combination of insurance and investment. Here are the reasons why you should go for this plan.

  • High returns: ULIP plans to pool your money in various investment tools such as equity funds, balanced funds and debt funds. Hence, the risk factors are higher than other plans, and so is the interest rate.
  • Variety of options: In this single plan, you get a variety of investment instruments. You can choose equity, debt or balanced funds based on the level of risk you are willing to take.
  • Easy management: Once you start investing in any ULIP plans, you do not need to bother about managing your funds anymore. The experienced fund managers will do the job. Moreover, via the ULIP NAV displayed on the website of the insurer, you can easily track your units.
  • Transparency: What makes ULIP a reliable investment option is transparency in its operations. There are no hidden charges, and everything is pre-decided. The NAV shows the state of your units daily.
  • Liquidity: In the time of any emergency, you can opt for a premature withdrawal from your ULIP plan. Furthermore, by regularly monitoring your NAV, you can plan your finance accordingly.
  • Low closure charges: Your ULIP plan may become unsuitable for you or you may want to close your policy before the term ends. In any such scenario, most investment plans charge a high amount. The closure charges under ULIP are significantly lower.

Things to check before investing in ULIP

Keep the following things in check before you start investing in any ULIP plan.

  • Do your research and compare all your options to find the best suit for your investment goal.
  • Evaluate the performance of the insurance companies to ensure their credibility.
  • Find out all the charges associated with the plan you are opting for.
  • Decide as per your investment goals.

Types of Unit Linked Insurance Plans

The Unit Linked Insurance Plans are categorized based on two factors. The different types are laid out below.

Categorization of ULIP by objective

The Unit Linked Insurance Plans are classified in the following four sections based on the objectives.

  • Retirement ULIP: Pay the premiums during employment years and receive benefits in the form of annuities after retirement.
  • Wealth collection ULIP: The premiums accumulate over the policy term and help in wealth generation.
  • Child education ULIP: Pay the premiums and get the benefits in small amounts for the requirement of your children.
  • Health benefit ULIP: Avail financial assistance during medical emergencies along with the common benefits.
Categorization of ULIP by death benefits

Based on the death benefits, the ULIP plan can be divided into the following two.

  • ULIP Type 1: The beneficiary receives the higher amount between the sum assured and the fund value.
  • ULIP Type 2: The beneficiary receives the total amount of the sum assured and the fund value.

About ULIP Funds

ULIP funds refer to the set of funds in which the investments are made. There are four common funds offered by the best ULIP plans.

  • Cash fund: These are bank deposits and money market funds that have lower risks.
  • Debt fund: These are income funds, fixed interest funds and bond funds with medium risk levels like government securities and corporate bonds. The lower risks justify the lower interest rates.
  • Equity fund: These are mainly company stock investments. Since these are associated with the stock market and get influenced by its volatility, they have high risk.
  • Hybrid fund: These are a combination of equity investments and instruments with fixed rates. The higher risk level of equity is countered by fixed interest instruments putting the fund in the medium-risk category.

How to buy a ULIP Plan Online?

Buying a ULIP plan online does not take much time and is completely hassle-free. Follow a few simple steps and get your policy today.

  • Land on the official website of your preferred insurance provider.
  • Select a ULIP plan.
  • Select the tenure and other details.
  • Select from the monthly, half-yearly or yearly premium options.
  • Make the payment using any of the online payment gateways.

ULIPs vs Other Insurance Plans

Factors ULIP Standard insurance plans
NatureA fusion of insurance plan and investment too.Basic insurance plan.
Investment optionInvest in equity, debt and debt funds Invest in only debt funds.
Switch fundsAllows switching from equity to debt or vice versa Does not allow to switch funds.
Risk levelHigh-risk level due to being a market-based productLow-risk level
Monitor investmentAllows tracking the investment via daily NAVDoes not provide any instrument for monitoring the investment
Partial withdrawalAllows partial withdrawal after completion of 5 yearsHas many restrictions on partial withdrawal
Loyalty benefitsGiven under long-term plansGiven if the full term is completed
Tax benefitsProvide tax benefits under section 80C and 10(10D) of the Indian Income Tax Act of 1961

ULIP Charges

The following charges are associated with Unit Linked Insurance Plans.

  • Premium allocation charges: Initial charges such as medical cost and underwriting cost levied on the investor before the premium is paid..
  • Administration charge: Regularly deducted by the insurer as maintenance of the policy.
  • Fund management charges: Charges for managing the equity, debt or hybrid funds in which the investment has been made and are decided by computing the net asset value.
  • Mortality charges: Deducted monthly to provide for the life cover of the policy. The amount varies based on the age and sum assured.
  • Partial withdrawal charges: Charges imposed by the insurer for any partial withdrawal before the term.
  • Fund switching charges: Deducted if the funds are changed in the middle of the term.
  • Discontinuance charges: Charges for discontinuance of the policy before the term ends. The amount is pre-set by IRDA and is the same for all insurers.


Is ULIP a good investment?

ULIP is a good investment for those who want a single instrument for both insurance and investment. Investors willing to take risks should go for ULIP.

How does the ULIP plan work?

Investors make regular payments under ULIP and receive the benefits of an insurance plan as well as an investment plan. In case of the demise of the policyholder before maturity, the beneficiary gets the sum assured as death benefits. In case the policyholder survives the policy period, the sum assured is provided as maturity benefit.

Is ULIP better than PPF?

In terms of benefits, ULIP may seem better than PPF as ULIP is an investment cum insurance plan, while PPF is just an investment tool. However, in terms of risk, PPF is far better as it offers fixed returns and is backed by a sovereign guarantee. On the contrary, ULIP is subject to market risks.

Is ULIP tax-free?

ULIP investments enjoy tax exemption up to ₹ 1.50 Lakh under 80C of the Income Tax Act of India. The maturity benefits are tax-free if they are 10 times over the yearly premium.

Why should I invest in ULIP?

You should invest in ULIP for the following reasons.

  • Offers features of insurance plans and investment plans
  • Has transparency and allows monitoring of the investment.
  • Generates higher interest rates
  • Provides both death benefits and maturity benefits.

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