ULIP: A Simple (But Complete) Guide

ULIP is a popular investment product that attracts several investors. If you are a first-time investor, he is a complete guide on invest in this life insurance-cum-investment product.

ULIP or Unit Linked Insurance Plan is considered as one of the most versatile and innovative financial products offered by the insurance sector in India. Every year several investors invest in ULIP without fully understanding what it is or how it can benefit it. So, if you are an amateur investor, here is a comprehensive guide on ULIP investment that can help you make the most out of it.

What is ULIP?

Unit Linked Insurance Plans is a hybrid financial tool that gives you a dual benefit of insurance protection and investment opportunity with a single product. When you pay the premium, a part of the amount is utilised towards offering life cover, and the remaining amount is invested in mutual funds to generate returns for you.

It allows goal-based investment

The ULIPs are specifically designed to help you accomplish your long-term and medium-term financial goals like buying a new house, building a corpus retirement, planning child’s future and tax planning. This goal-based investment opportunity allows you to fine tune your investment strategy and accomplish the goal successfully.

It allows fund switching

When you invest in ULIP, you have the option to decide where you want to invest the funds to generate returns; you have a wide variety of mutual fund schemes to choose from. Depending on your risk-taking capacity, and your future goals, you can choose to allocate the fund in debt funds, equity funds or balanced funds.

Generally, most insurance companies provide the investors the option to invest in five to seven funds options for diversification purposes and minimise the risk. The insurers also provide switch options, to help the investors maximise their gains. For example, if you have invested a major portion of your funds in equity funds, you can switch to invest in debt funds and vice-versa based on the existing market trends.

You get Top-up Option

Top-up option is a facility offered by insurance companies that allows you to invest the additional cash flow (that you may have) in ULIP through top-up premium. The amount is paid over and above the pre-decided premium amount.

The best thing about the top-up option is that the additional premium you pay is eligible for tax benefit under Section 80C and Section 10(10D) of the Indian Income Tax Act. However, you must know that you can get tax benefits only if the additional premium you pay is less than 10% of the sum assured amount.

 ULIP comes with a lock-in period and surrender option

While you get the benefit of investment in mutual funds and market-linked returns through investment in ULIP, remember is it primarily an insurance product and comes with a lock-in period of five years. However, as a policyholder, you have the option to surrender the policy before the lock-in period.

However, when you surrender the policy before five years, the insurance company does not pay the fund value immediately after the surrender. The insurer will levy a surrender charge and transfer the amount to the discontinuance policy fund. The money remains there until the end of five year, after which you can withdraw the funds.

If you continue your policy for five years, and exit the fund, you need not pay any discontinuance charges and you can get the funds value immediately.

Partial Withdrawal

One of the significant benefits of investing in ULIP is that it offers higher liquidity than other insurance products. You have the option to partially withdraw the funds to meet your immediate financial needs without affecting the policy tenure.

Final Word

Now that you are aware of the different aspects of ULIP make sure that you invest in this policy and get one step close to accomplishing your financial goals.