ULIP or Unit Linked Investment Plan is a combination of insurance and investment. A portion of the premium paid by the policyholder is utilised to provide insurance coverage to the policyholder, while the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company providing such plans is invested in varying proportions of debt and equity securities. Each policyholder has the option to select a personalised investment plan based on their investment needs and risk appetite. Each policyholder’s unit-linked insurance plan holds a certain number of fund units, each of which has a net asset value (NAV) that is declared on a daily basis. The NAV is the value upon which net rates of return on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and fund performance.
A portion of the premium goes towards mortality charges – that is, providing life cover. The remaining portion gets invested funds of policyholder’s choice. Invested funds continue to earn market-linked returns.
ULIP policyholders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reducing or increasing the level of protection, options to surrender, and additional riders to enhance coverage and returns as well as tax benefits.
One may opt for a ULIP for any or all of the following reasons:
- Market-linked returns
- Investment and life protection combined
- Flexibility to choose from a basket of funds
- Income tax deductions (under 80C and Section 10 (10) D of Income Tax Act)
- Financial security post retirement
Types of ULIPs
Depending upon the death benefit, there are broadly two types of ULIPs.
- Type-I ULIP
Under this plan, the nominee gets the higher of the sum assured or the accumulated fund value (that is, whichever is higher) in case of the policyholder’s death.
- Type-II ULIP
Here, the nominee gets the sum assured plus the accumulated fund value in the event of demise of the policyholder.
There are a variety of ULIPs to choose from based on the investment objectives of the investor, their risk appetite, as well as the investment horizon. Some ULIPs play it safe by allocating a larger portion of the invested capital to debt instruments, while others invest in equity only. Again, all this is totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.