What is ULIP Plan And How Does It Work?

What is ULIP Plan and how does it work?

In the insurance world, different plans are available according to our every need. ULIP plan is a unique financial product offered by the insurance company which fulfills both our insurance and investment needs. Through our article, we will try to understand this plan and know its working.

What is ULIP plan?

ULIP stands for: Unit Linked Insurance Plan

ULIP is a plan offered by the insurance company in which we get the features of both investment and life insurance together. That is, if a person takes a ULIP policy, he not only gets life cover but also gets the benefit of good investment returns. Some part of the premium paid in ULIP plan is invested in your insurance cover and some part in different investment options like equity, debt, hybrid etc. Due to investment in equity and debt, the returns received in it are also higher as compared to other investment options. If the policyholder dies due to any reason, a lumpsum amount is paid to his nominee as death benefit.

How does ULIP plan work?

As mentioned earlier, in ULIP plan you get the qualities of both investment and insurance. Whenever you pay the premium of a ULIP plan, a part of it goes towards insurance coverage and the other part is invested in different funds selected according to your risk profile. This fund can be equity fund, debt fund, hybrid fund or index fund. In exchange for the investments made in these funds, you are allotted units whose NAV is calculated on a daily basis and your investment returns depend on the NAV. The premium paid towards the insurance cover provides you life coverage in which if the insured person dies, the death benefit is given to the nominee. Many charges can be taken from you in ULIP plan, which may include fees for fund management, administration charges etc. Almost all ULIP plans come with a lock in period which is 5 years. You cannot withdraw any money during this lock period. After 5 years, partial withdrawal can be taken from ULIP plan as per your need. If you wish, you can change the fund being invested during the tenure of the policy or increase or decrease the sum assured amount.

Types of ULIP plans

We can divide ULIP plan into different parts on three basis. The first is based on the investment in funds made by ULIP plans, the second is based on their returns and premiums and the third is based on the death benefit received.

On the basis of investment

ULIP plans invest in different asset classes or funds to generate good returns. These funds include:

Equity: In this type of plan, a part of the premium is invested in equity fund i.e. a mutual fund scheme that invests in the stocks of private companies. Such funds involve high risk and high returns. People who want higher returns on their investment can choose this asset class.

Debt: Debt are funds that invest in fixed income instruments like government bonds, securities, debentures etc. where fixed returns are guaranteed after a time period. The risk in these funds is less but at the same time the returns are also less as compared to equity.

Balanced: As the name suggests, such funds include a combination of both equity and debt. Due to investment in the balance amount, both its risk and return are reduced. We can say that these funds are less risky than equity funds but give higher returns than debt funds.
Based on returns and premium

The following plans come under this category:

Single Premium ULIP Plan: In such plans, the premium is paid in one go only at the time of purchasing the policy.

Regular Premium ULIP Plan: In such plans, premium can be paid regularly like monthly, quarterly, half yearly or annually. This premium may have to be paid from the inception of the policy till its maturity.

Guaranteed ULIP Plan: The returns received in such ULIP plans are guaranteed. Under this plan, most of the investments are made in less risky i.e. debt funds. If you are investing for a specific goal then this plan may be right for you.

Non-Guaranteed ULIP Plan: In non-guaranteed ULIP plans, investments are made in instruments like equity funds to maximize returns. Due to investment in equity, the returns here can be higher but it is also equally risky and volatile.

Life Stage ULIP Plan: In this type of ULIP plan, the investment goes according to the age of the insured. It is often seen that a person’s ability to take risk decreases with age. In his youth, he is able to earn well and work, hence he is able to take more risks, whereas as his age increases, safe and less risky options of investment are suitable for him because at this stage of age, everyone needs a stable income. . This ULIP plan works on this principle. As long as the age of the insured person is young, this plan invests more in equity funds and as his age increases, the proportion of investment is reduced from equity to more in debt. It works to balance the risk and return of investment.

On the basis of death benefit

Type 1: Under this plan, the nominee gets either the sum assured or the fund value as death benefit. In such a case, whichever option has the higher value is paid.

Type 2: In Type 2 plan, both fund value and sum assured are paid to the nominee. In this, the value of sum assured remains higher but at the same time the amount of premium to be paid also increases.

Locking period in ULIP plan

ULIP plans have a mandatory lock-in period of 5 years. Any partial withdrawal can be taken only after 5 years and that too is subject to minimum and maximum limits depending on the policy. Here it is also important to keep in mind that to withdraw any amount, you must have paid all the premiums for the last 5 years and you can withdraw only about 20% of the policy value in a financial year.

Benefits of ULIP plan

Market Linked Returns: Unlike other life insurance plans that offer a fixed return that often does not beat inflation, ULIP returns are market linked and are generated by investing mostly in equity and debt funds. This return can be much higher than other investment tools.

Insurance Coverage: Along with investment, ULIP plans also provide insurance coverage. On the death of the insured person, a lump sum amount is paid to the nominee.

Tax Benefit: Tax benefit can be availed on the premium paid and returns received in ULIP plan under the Income Tax Act.

Flexibility: The investor has the option to choose the investment option as per the risk. Keeping in mind his returns, he can choose what portion to invest in equity and debt.

Helpful in creating wealth: Since ULIP plans offer a good return compared to other plans, we get the benefits of both wealth creation and insurance coverage in the long term.
Disadvantages of ULIP plan – Disadvantages of ULIP plan

Charges: On taking ULIP plan, you may have to pay many types of charges. These may include charges like fund management charges, administration fees, mortality etc. which reduce the total returns of the fund.

Market Risk: To generate good returns in ULIP plans, investments are made in market related instruments and funds. Along with giving higher returns, they also involve more risk.

Lock in period: There is a lock in period of about 5 years in ULIP plan, only after which partial money can be withdrawn. This can cause problems for investors who need money in the short term.

Complex: Understanding the insurance and investment part of a ULIP plan can be quite complex for investors. They may have difficulty understanding the many terms and investment components involved.

Not suitable for everyone: Such plans are not suitable for those people who have good knowledge of the financial market and can manage their investments themselves. Such people can just take a pure life insurance policy and manage the investment themselves and generate good returns.

Difference between ULIP and traditional plan

ULIP Plan	Traditional Plan
ULIP plans are a combination of insurance and investment.	Traditional plans are primarily an insurance product.
The investment returns in these are higher than traditional plans because they are market linked.	These usually offer fixed returns and bonuses, if applicable.
Because of being market linked, they are more risky	because of having fixed returns, they are less risky.
There is flexibility in choosing premium payment and investment fund.	Due to strict terms and conditions, these products are not very flexible.
There are many charges involved which reduce the investment returns.	These generally include lower charges than ULIP plans.
Investors can track the performance of their investment funds in ULIP plans.	The policy holder is not aware of where the premium paid by him is being used.

Conclusion

ULIP is a plan that gives us the benefits of both insurance coverage and investment. While in other insurance plans the returns are fixed or low, in ULIP plans the returns are generated by investing in market linked equity, debt and balance funds etc., hence it is better in many ways. While ULIP plan has its own advantages, it also has some disadvantages such as investment and administrative charges associated with it, lock in period and market risk. If you are also thinking of taking a ULIP plan, then keep all these facts in mind and take any decision only after comparing it with other insurance and investment options.