Unit Linked Insurance Plan (ULIP's)


What is a ULIP?

A Unit Linked Insurance Plan, popularly known as ULIP, is a financial product that offers investment as well as insurance (risk) cover. The features of ULIP are similar to those of mutual funds; except that ULIPs are investment products with insurance benefits. ULIPs are basically investment products with a thin wrapper of insurance around them.

A Unit Linked Insurance Plan ( ULIP), is a financial product that combines investment as well as insurance.  In an ULIP the premium amount, after deduction of charges, is invested into funds of your choice. The fund could be equity based, debt based etc. The performance of the fund will depend on the market.  You can switch between the funds. The features of ULIP are similar to those of mutual funds except that ULIPs are investment products with insurance benefits. Since Ulips are insurance plans, the gains and maturity proceeds are tax-free under Section 10(10d).  If the life cover is not 10 times the annual premium, you won’t get any tax deduction and the corpus will also be taxable on maturity. The deduction under Sec 80C is capped at Rs 1.5 lakh

How does ULIP work?

When you buy a ULIP you pay the premium just like for an insurance policy. Unlike the insurance policy the premium is not just for insurance but also for investment. After deducting some charges (some in beginning, some during the policy term) and for insurance ,the amount left gets invested into mutual fund of your choice. ULIPS have different funds with different risk-return profile. One may have allocation of 80-20 to equity and debt , some other can have 50-50 and some can have 20-80. You can switch between the funds (max 4 free switches in most of the cases , there after some nominal fees)

For example you buy a ULIP for annual premium of Rs 30,000 for 20 years.  The plan will give him a cover of Rs 3 lakh (10 times the annual premium). After charges are deducted, say Rs 5,000, the amount left (Rs 25,000) is invested in a fund. Suppose the  fund  has NAV of Rs 10. So you will get  2500 units(25,000/10) of the fund. If fund NAV increases value of your fund also increases. So If after an year, the NAV is Rs 11, then your fund value will Rs 27,500(2500 units x Rs 11). This amount is lower than Rs 30,000 which was invested. If NAV has fallen, then the fund value would be lesser.