ULIP: Unit Linked Insurance Plans – Meaning and Types

Unit Linked Insurance Plans or ULIPs offers insurance coverage and investment. Know its types, costs associated, risks, and how to chose ULIP

This post was most recently updated on December 24th, 2022

ULIP stands for Unit Linked Insurance Plans. It is a type of insurance policy that combines the features of term insurance with investment. 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 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.

Unit Linked Insurance Plans
Unit Linked Insurance Plans (ULIP)

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:

  1. Premium payment: The policyholder pays premiums to the insurance company on a regular basis, typically on a monthly, quarterly, or annual basis.
  2. 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.
  3. 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.
  4. 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:

  1. Equity ULIPs: In Equity ULIPs, a portion of the payments is utilized toward the purchase of equity shares, typically across several different companies. As a result of the direct investment in equity, it is much riskier than other Unit Linked Insurance Plans because the investment corpus may be directly impacted by changes in share price. The potential for profits is bigger nevertheless for the exact same reason. Therefore, equities ULIPs are the best option for investors with a high-risk tolerance.
  2. Debt ULIPs: Debt ULIPs are a type of ULIP that focuses on investing in debt instruments, such as fixed-income securities, corporate bonds, and government bonds. These types of investments tend to be less risky than investments in equities, such as stocks, and offer a lower potential return. As a result, debt ULIPs are generally considered a more conservative investment option and may be suitable for individuals who are risk-averse or looking for steady, consistent returns over the long term.
  3. Balanced funds ULIPs: Balanced funds ULIPs are a type of ULIP that invest in a mix of both debt and equity instruments, with the goal of providing a balance of stability and potential for capital appreciation. These types of investments may be suitable for individuals who are looking for a moderate level of risk and the potential for higher returns than those offered by more conservative investments, such as debt ULIPs.
  4. Liquid funds ULIPs: Liquid funds ULIPs are a type of ULIP that invest in highly liquid, low-risk debt instruments, such as short-term government securities and certificates of deposit (CDs). These investments offer a high level of safety and the potential for stable, low returns over the short term. Liquid funds ULIPs may be suitable for individuals who are looking for a safe place to park their money for a short period of time and are willing to accept a lower potential return in exchange for the stability and liquidity provided by these investments.
  5. Cash funds ULIPs: Cash funds ULIPs are a type of ULIP that invest in highly liquid, low-risk debt instruments, such as short-term government securities, certificates of deposit (CDs), and money market instruments. These investments offer a high level of safety and the potential for stable, low returns over the short term. Cash funds ULIPs may be suitable for individuals who are looking for a safe place to park their money for a short period of time and are willing to accept a lower potential return in exchange for the stability and liquidity provided by these investments.

Types of Unit Linked Insurance Plans (ULIP) based on plan structure

Unit Linked Insurance Plans (ULIP) plans are structured as below:

  1. Regular v/s single premium ULIPs: The main difference between regular premium ULIPs and single premium ULIPs is the frequency and amount of premiums that policyholders are required to pay. Regular premium ULIPs require policyholders to make regular payments, typically on a monthly or annual basis, while single premium ULIPs require a single upfront payment.
  2. Guaranteed v/s non-guaranteed ULIPs: The main difference between guaranteed ULIPs and non-guaranteed ULIPs is the level of risk and potential return that they offer. Guaranteed ULIPs are designed to provide a minimum guaranteed return on investment, regardless of market conditions. This means that policyholders can expect a certain level of return, even if the underlying investments perform poorly. Non-guaranteed ULIPs, on the other hand, do not offer a guaranteed return and the potential return on investment will depend on the performance of the 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:

  1. Premiums allocation charges: Your subscription payment will be reduced upfront by Premiums allocation fees. An upfront deduction means that some money is taken out as premium allocation charges before your ULIP investment is split between the insurance and investing parts. These fees cover the costs the insurer incurred in order to underwrite and market the plan to you. This could be as high as 10% for regular premiums and 5% for Single premiums.
  2. Fund management charges: ULIPs typically have fund management charges, which are a percentage of the premium paid by the policyholder. These charges are used to cover the cost of managing the investment component of the policy. This ranges between 0.5% to 2% per annum.
  3. Mortality charges: Mortality charges are used to cover the cost of providing life insurance coverage under the ULIP policy. These charges are deducted from the premium paid by the policyholder and are based on factors such as the policyholder’s age, health, and the sum assured. This charge is added by giving you fewer units of the actual fund.
  4. Policy administration charges: ULIPs may have policy administration charges, which are a percentage of the premium paid by the policyholder. These charges are used to cover the cost of administering the policy, including expenses such as underwriting and claims processing. Typically between 0.1% to 0.5%. The charges increase with policy years.
  5. Surrender charges: In some cases, policyholders may incur charges if they decide to cancel their ULIP policy before its maturity. These charges are typically a percentage of the accumulated investment returns. Depends on when the policy is surrendered.
  6. Switching charges: If you decide to switch between funds in the Ulips investing part, your insurer may charge you for this. For instance, if you previously invested in an equity fund and wish to switch to a different fund, such as a debt or hybrid fund. Most of the ULIPs allow a free switch of funds at least once per year.

If you see above the charges levied by the insurance company for your 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:

  1. Deduction on premiums: Policyholders may be able to claim a deduction on the premiums paid for a ULIP policy under Section 80C of the Income Tax Act. The maximum deduction allowed is INR 1.5 lakh per financial year.
  2. Exemption on maturity: The maturity benefits received from a ULIP policy are generally tax-exempt under Section 10(10D) of the Income Tax Act, subject to certain conditions.
  3. Exemption on death: The death benefit received from a ULIP policy is 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:

  1. Customizable investment options: ULIPs allow policyholders to choose from a range of investment funds based on their financial goals and risk appetite.
  2. Professional fund management: The investment component of a ULIP is managed by professional fund managers, which can help maximize returns and minimize risk.
  3. Tax benefits: ULIP premiums and benefits may be eligible for tax exemptions under certain circumstances, as per the Income Tax Act of 1961.
  4. Flexibility: Policyholders may have the option to switch between investment funds or alter their premium payments based on their changing financial needs.
  5. 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.
  6. 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:

  1. High charges: ULIPs may have higher charges compared to other investment options, such as mutual funds, which can impact the overall returns on investment.
  2. 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.
  3. 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.
  4. Surrender charges: In some cases, policyholders may incur charges if they decide to cancel their ULIP policy before its maturity.
  5. 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:

  1. Structure: ULIPs are insurance policies that combine term insurance with investment, while mutual funds are investment vehicles that pool the money of multiple investors.
  2. Investment options: ULIPs offer policyholders the ability to customize their investment portfolio, while mutual fund investors do not have this option.
  3. Risk profile: ULIPs are subject to market-linked risk, as the value of the policy is linked to the performance of financial markets. Mutual funds also carry market risk, but the level of risk may vary based on the type of fund and the underlying securities it holds.
  4. Charges: ULIPs may have higher charges compared to mutual funds, which can impact the overall returns on investment.

ULIP vs ELSS vs PPF

Here is a quick comparison of ULIP vs ELSS vs PPF:

ParticularsULIPsELSSPPF
Lock-in periodFive yearsThree years15 years
Tax benefits80C and returns from the policy on maturity are exempt under section 10 (10D). 
80C80C and maturity amount is exempt from taxation
TaxationGains are taxable depending on the underlying assetGains above Rs 1 lakh in any given financial year is taxable under LTCG at 
10%
None
Underlying assetsEquity, debt, and balancedEquityFixed-income oriented
Risk (when compared to each other)Highest among the lotNot as risky as UlipsRisk-free with guaranteed returns as it is backed by the 
government
ChargesThere 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
ULIP vs ELSS vs PPF

Should You buy ULIP plans for investments?

While 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 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 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 ULIP is nothing but a combination of 2 products.

  1. Insurance plan
  2. Mutual fund

In 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) which are popular amongst investors are as below:

  1. HDFC Life Sampoorn Nivesh
  2. HDFC Life ProGrowth Plus
  3. LIC NIVESH PLUS
  4. LIC New Pension Plus
  5. LIC SIIP
  6. ICICI Pru Guaranteed Wealth Protector
  7. ICICI Pru Smart Life
  8. SBI Life – eWealth Insurance
  9. SBI Life – Smart Wealth Assure
  10. SBI Life – Smart Privilege

FAQs on Unit Linked Insurance Plans (ULIP)

  1. What is a ULIP?

    A ULIP (unit-linked insurance plan) is a type of insurance product that combines elements of both insurance and investment. Policyholders are able to invest in a variety of financial instruments, such as stocks, bonds, and mutual funds, while also receiving insurance coverage.

  2. 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.

  3. 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.

  4. 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.

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