Best ULIPs in India: Unit Linked Insurance Plans – Meaning and Types in 2023
This post was most recently updated on October 28th, 2023
ULIP stands for Unit Linked Insurance Plans. It is a type of insurance policy that combines the features of term insurance with investments. In a ULIP, a portion of the premium paid by the policyholder is used to provide life insurance coverage, while the rest is invested in various financial instruments such as stocks, mutual funds, and bonds.
The investment component of a ULIP is managed by professional fund managers, and the policyholder has the option to choose the type of investment fund that best suits their needs and risk appetite.
ULIPs offer a number of benefits to policyholders in India, including the ability to customize their investment portfolio, tax benefits, and the flexibility to switch between funds. However, ULIPs also have some drawbacks, such as high charges and the possibility of market-linked risk.
It is important for policyholders to carefully consider their financial goals and risk tolerance before deciding whether a ULIP is the right investment option for them.
Consider reading: ULIP vs ELSS Which is Better to Invest?
Page Contents
How does a Unit Linked Insurance Plans (ULIP) Work and What is the Meaning of ULIP?
ULIPs, or Unit Linked Insurance Plans, are a type of insurance policy that combines the features of term insurance with investment. Here’s how ULIPs generally work:
- Premium payment: The policyholder pays premiums to the insurance company on a regular basis, typically on a monthly, quarterly, or annual basis.
- Investment allocation: A portion of the premium paid by the policyholder is used to provide life insurance coverage, while the rest is invested in various financial instruments such as stocks, mutual funds, and bonds. The policyholder has the option to choose the type of investment fund that best suits their needs and risk appetite.
- Fund management: The investment component of a ULIP is managed by professional fund managers, who use the policyholder’s premiums to purchase a diversified portfolio of securities. The value of the policy is linked to the performance of the financial markets.
- Maturity or death: If the policyholder survives the policy term, they may receive the accumulated investment returns upon policy maturity. If the policyholder dies during the policy term, the nominee may receive the sum assured plus any accumulated investment returns.
Types of Unit Linked Insurance Plans (ULIP) based on Fund Type
In India, ULIPs, or Unit Linked Insurance Plans, are classified into 5 main types based on the investment options offered to policyholders:
| ULIP Type | Investment Focus | Risk Level | Potential Return | Suitable Investor Profile |
|---|---|---|---|---|
| Equity ULIPs | Equity shares of multiple companies | High risk | High | Investors with high-risk tolerance |
| Debt ULIPs | Debt instruments (fixed-income securities, bonds, government bonds) | Low risk | Lower | Risk-averse individuals seeking steady returns |
| Balanced Funds ULIPs | Mix of debt and equity instruments | Moderate risk | Moderate | Individuals seeking a balance of stability and potential return |
| Liquid Funds ULIPs | Highly liquid, low-risk debt instruments | Low risk | Stable, low | Individuals looking for short-term stability and liquidity |
| Cash Funds ULIPs | Highly liquid, low-risk debt instruments | Low risk | Stable, low | Individuals looking for short-term stability and liquidity |
Types of Unit Linked Insurance Plans (ULIP) based on Plan Structure
Unit Linked Insurance Plans (ULIP) plans are structured as below:
| ULIP Type | Premium Payment Frequency | Premium Payment Mode | Return Guarantee |
|---|---|---|---|
| Regular Premium ULIP | Regular payments | Monthly or Annual | Non-guaranteed |
| Single Premium ULIP | Single upfront payment | Lump sum | Non-guaranteed |
| Guaranteed ULIP | N/A | N/A | Minimum guaranteed return regardless of market conditions |
| Non-guaranteed ULIP | N/A | N/A | Return depends on the performance of underlying investments |
What are the Costs Associated with Unit Linked Insurance Plans (ULIP)
There are several costs associated with Unit Linked Insurance Plans that policyholders should be aware of, including:
| Charges | Description |
|---|---|
| Premiums Allocation Charges | Upfront deduction from the premium to cover costs incurred by the insurer. – Regular Premiums: Up to 10% deduction – Single Premiums: Up to 5% deduction |
| Fund Management Charges | Percentage of premium paid to cover investment management costs. Range: 0.5% to 2% per annum |
| Mortality Charges | Charges to cover the cost of life insurance coverage. Deducted based on factors like age, health, and sum assured |
| Policy Administration Charges | Charges to cover policy administration expenses. Percentage of premium paid. Range: 0.1% to 0.5% (typically increases with policy years) |
| Surrender Charges | Charges are incurred if the policy is canceled before maturity. Typically a percentage of accumulated investment returns. |
| Switching Charges | Charges for switching between funds within the ULIP. May have a free switch once per year. |
If you see above the charges levied by the insurance company for your Unit Linked Insurance Plans (ULIPs). You are almost giving away 5-10% of your investment amount just on these charges.
Tax Benefits of Unit Linked Insurance Plans (ULIP)
In India, ULIP premiums and benefits may be eligible for tax exemptions under certain circumstances, as per the Income Tax Act of 1961.
The tax benefits of Unit Linked Insurance Plans in India include:
| Tax Benefits | Description |
|---|---|
| Deduction on Premiums | Policyholders can claim a deduction on premiums paid for ULIPs under Section 80C of the Income Tax Act. Maximum deduction allowed: INR 1.5 lakh per financial year. |
| Exemption on Maturity | Maturity benefits received from ULIP policies are generally tax-exempt under Section 10(10D) of the Income Tax Act. Subject to certain conditions. |
| Exemption on Death | Death benefits received from ULIP policies are generally tax-exempt under Section 10(10D) of the Income Tax Act. Subject to certain conditions. |
Advantage of Unit Linked Insurance Plans (ULIP)
They offer a number of advantages of Unit Linked Insurance Plans (ULIP) to policyholders in India, including:
- Customizable investment options: ULIPs allow policyholders to choose from a range of investment funds based on their financial goals and risk appetite.
- Professional fund management: The investment component of a ULIP is managed by professional fund managers, which can help maximize returns and minimize risk.
- Tax benefits: ULIP premiums and benefits may be eligible for tax exemptions under certain circumstances, as per the Income Tax Act of 1961.
- Flexibility: Policyholders may have the option to switch between investment funds or alter their premium payments based on their changing financial needs.
- Surrender value: In some cases, policyholders may be able to get a portion of their investment back if they decide to cancel their policy before its maturity.
- Death benefit: In the event of the policyholder’s death, the nominee may receive the sum assured plus any accumulated investment returns.
Disadvantages of Unit Linked Insurance Plans (ULIP)?
While they offer a number of advantages to policyholders, there are also some potential disadvantages of Unit Linked Insurance Plans (ULIP) to consider:
- High charges: ULIPs may have higher charges compared to other investment options, such as mutual funds, which can impact the overall returns on investment.
- Market-linked risk: The investment component of a ULIP is linked to the performance of financial markets, which means that the value of the policy may fluctuate based on market conditions.
- Complexity: ULIPs may be more complex compared to other investment options, and policyholders may need to have a good understanding of the investment options and charges involved.
- Surrender charges: In some cases, policyholders may incur charges if they decide to cancel their ULIP policy before its maturity.
- Partial withdrawal restrictions: ULIPs may have restrictions on the amount of money that can be withdrawn from the policy before its maturity.
What is the Difference Between ULIP and Mutual Funds?
Unit Linked Insurance Plans, are a type of insurance policy that combines the features of term insurance with investment.
A portion of the premium paid by the policyholder is used to provide life insurance coverage, while the rest is invested in various financial instruments such as stocks, mutual funds, and bonds.
The investment component of a ULIP is managed by professional fund managers, and the policyholder has the option to choose the type of investment fund that best suits their needs and risk appetite.
Mutual funds, on the other hand, are investment vehicles that pool the money of multiple investors and use it to purchase a diversified portfolio of securities, such as stocks, bonds, and other assets.
Mutual fund investors do not have the option to customize their investment portfolio, but they can choose from a range of mutual fund schemes that are managed by professional fund managers.
There are some key differences between ULIPs and mutual funds:
| Comparison Factor | ULIPs | Mutual Funds |
|---|---|---|
| Structure | Combines term insurance with investment | Pure investment vehicles |
| Investment Options | Customizable investment portfolio | Limited customization for investors |
| Risk Profile | Market-linked risk | Market risk varies based on fund and securities |
| Charges | May have higher charges compared to mutual funds | Generally lower charges |
ULIP vs ELSS vs PPF
Here is a quick comparison of Unit Linked Insurance Plans (ULIP) vs ELSS vs PPF:
| Particulars | ULIPs | ELSS | PPF |
| Lock-in period | Five years | Three years | 15 years |
| Tax benefits | 80C and returns from the policy on maturity are exempt under section 10 (10D). | 80C | 80C and maturity amount is exempt from taxation |
| Taxation | Gains are taxable depending on the underlying asset | Gains above Rs 1 lakh in any given financial year is taxable under LTCG at 10% | None |
| Underlying assets | Equity, debt, and balanced | Equity | Fixed-income oriented |
| Risk (when compared to each other) | Highest among the lot | Not as risky as Ulips | Risk-free with guaranteed returns as it is backed by the government |
| Charges | There are at least five charges in Ulips: Mortality charge premium allocation charge switching charge surrender charge Policy administration charge | The expense ratio is mostly in the range of 1.05 to 2.25%. Very few plans have an expense ratio of more than 2.25% and may range up to 3% or more. | One-time account opening charge of Rs 100 |
Consider reading: ULIP Vs ELSS Which is a Better Investment
Should You Buy ULIP Plans for Investments?
While Unit Linked Insurance Plans (ULIPs) may offer a number of benefits, including customizable investment options and professional fund management, they may not be the right investment option for everyone.
It is important for individuals to carefully consider their financial goals and risk tolerance before deciding whether a Unit Linked Insurance Plan (ULIP) is the right investment option for them.
ULIPs may be suitable for individuals who are comfortable with market-linked risk and are looking for a long-term investment option that offers both insurance coverage and the potential for capital appreciation.
However, ULIPs may not be suitable for individuals who are risk-averse or looking for a short-term investment option.
It is also important to carefully read and understand the terms and conditions of a Unit Linked Insurance Plans (ULIP) plan before purchasing it, as the features and benefits offered may vary between different insurance companies and plans.
It is recommended to consult with a financial advisor or insurance professional to help determine the most appropriate investment option for your needs.
Consider reading – 13 Safe investment options with high returns in India
What are Alternatives for Unit Linked Insurance Plans (ULIP)?
I am sure by now you must have realized that Unit Linked Insurance Plans (ULIP) is nothing but a combination of 2 products.
- Insurance plan
- Mutual fund
In Unit Linked Insurance Plans (ULIP) a professional fund manager is buying an insurance plan and a mutual fund on your behalf depending on the type of ULIP you have selected. You are paying high charges for the fund manager to manage your money on your behalf.
A great alternative to ULIPs is to buy a good term insurance and Mutual fund(equity/debt/balanced depending on our risk appetite) separately.
By doing so you will probably save almost 5% of your invested capital as you don’t have to pay for that premium allocation, Fund management, and Mortality charges.
If you buy Term insurance separately then you will have more life coverage compared to what the ULIP plan might have offered you.
Buying a mutual fund separately will also give you the freedom to select the type of fund you want to buy. You can go for ELSS mutual funds if you are looking to save taxes.
Popular Unit Linked Insurance Plans (ULIP) Available to Buy in India
Some of the Unit Linked Insurance Plans (ULIP) that are popular amongst investors are as below:
- HDFC Life Sampoorn Nivesh
- HDFC Life ProGrowth Plus
- LIC NIVESH PLUS
- LIC New Pension Plus
- LIC SIIP
- ICICI Pru Guaranteed Wealth Protector
- ICICI Pru Smart Life
- SBI Life – eWealth Insurance
- SBI Life – Smart Wealth Assure
- SBI Life – Smart Privilege
You can check HDFC ULIP plans on their website.
FAQs on Best Unit Linked Insurance Plans (ULIP)
What is a Unit Linked Insurance Plan (ULIP)?
A Unit Linked Insurance Plan (ULIP) combines investment and life insurance. It helps achieve long-term goals while providing financial protection for your family in case of emergencies. ULIPs offer growth potential and flexibility to suit your financial needs.
How do ULIPs work?
ULIPs work by allowing policyholders to invest a portion of their premium payments in a variety of financial instruments, such as stocks, bonds, and mutual funds. The value of the policy is linked to the performance of the underlying investments, and policyholders have the option to switch between investment options as needed. ULIPs also provide insurance coverage to policyholders.
What are the risks of ULIPs?
ULIPs, like any investment product, carry some level of risk. The value of the policy and the potential return on investment will depend on the performance of the underlying investments, which can fluctuate due to market conditions. ULIPs may also come with fees and charges that can impact the overall return on investment.
Who should consider investing in ULIPs?
ULIPs may be suitable for individuals who are looking for a combination of insurance coverage and the potential for capital appreciation, and who are willing to accept the risks associated with investing in financial instruments such as stocks, bonds, and mutual funds. It’s always a good idea to carefully review the terms and conditions of any financial product before making a decision to invest and to seek professional financial advice if you are unsure about the suitability of a particular ULIP for your needs.
What is an example of unit-linked insurance?
An example of unit linked insurance (ULIP) is when you invest Rs. 100,000 annually in a ULIP, which provides a life cover of Rs. 10 lakhs (10 times the annual premium). In the event of your demise within the policy term, the ULIP guarantees at least 105% of the total premiums to your family. ULIPs offer a combination of investment and insurance.
What is the period of Unit Linked Insurance Plan?
The period of a Unit Linked Insurance Plan or ULIP varies, with a lock-in period of five years. However, for optimal returns, it is recommended to hold a ULIP for 15 years or more. ULIPs combine life insurance and mutual funds, making them suitable for long-term investments.
What is ULIP plan benefits?
ULIP plans offer various benefits, including flexible premium payments, the ability to switch funds between equity and debt, and partial withdrawals as needed. Additionally, you have the freedom to choose investment options based on your risk appetite. ULIPs provide a comprehensive solution to meet your financial goals with ease.
