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Best ULIPs in India: Unit Linked Insurance Plans – Meaning and Types in 2023

This post was most recently updated on October 28th, 2023

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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.

Unit Linked Insurance Plans
Unit Linked Insurance Plans

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?

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:

ULIP TypeInvestment FocusRisk LevelPotential ReturnSuitable Investor Profile
Equity ULIPsEquity shares of multiple companiesHigh riskHighInvestors with high-risk tolerance
Debt ULIPsDebt instruments (fixed-income securities, bonds, government bonds)Low riskLowerRisk-averse individuals seeking steady returns
Balanced Funds ULIPsMix of debt and equity instrumentsModerate riskModerateIndividuals seeking a balance of stability and potential return
Liquid Funds ULIPsHighly liquid, low-risk debt instrumentsLow riskStable, lowIndividuals looking for short-term stability and liquidity
Cash Funds ULIPsHighly liquid, low-risk debt instrumentsLow riskStable, lowIndividuals looking for short-term stability and liquidity
Types of Unit Linked Insurance Plans (ULIP) based on Fund Type

Types of Unit Linked Insurance Plans (ULIP) based on Plan Structure

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

ULIP TypePremium Payment FrequencyPremium Payment ModeReturn Guarantee
Regular Premium ULIPRegular paymentsMonthly or AnnualNon-guaranteed
Single Premium ULIPSingle upfront paymentLump sumNon-guaranteed
Guaranteed ULIPN/AN/AMinimum guaranteed return regardless of market conditions
Non-guaranteed ULIPN/AN/AReturn depends on the performance of underlying investments
Types of Unit Linked Insurance Plans (ULIP) based on Plan Structure

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:

ChargesDescription
Premiums Allocation ChargesUpfront 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 ChargesPercentage of premium paid to cover investment management costs.
Range: 0.5% to 2% per annum
Mortality ChargesCharges to cover the cost of life insurance coverage. Deducted based on factors like age, health, and sum assured
Policy Administration ChargesCharges to cover policy administration expenses. Percentage of premium paid.
Range: 0.1% to 0.5% (typically increases with policy years)
Surrender ChargesCharges are incurred if the policy is canceled before maturity. Typically a percentage of accumulated investment returns.
Switching ChargesCharges for switching between funds within the ULIP. May have a free switch once per year.
Costs Associated with Unit Linked Insurance Plans (ULIP)

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 BenefitsDescription
Deduction on PremiumsPolicyholders 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 MaturityMaturity benefits received from ULIP policies are generally tax-exempt under Section 10(10D) of the Income Tax Act.
Subject to certain conditions.
Exemption on DeathDeath benefits received from ULIP policies are generally tax-exempt under Section 10(10D) of the Income Tax Act.
Subject to certain conditions.
Tax Benefits of Unit Linked Insurance Plans (ULIP)

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:

Comparison FactorULIPsMutual Funds
StructureCombines term insurance with investmentPure investment vehicles
Investment OptionsCustomizable investment portfolioLimited customization for investors
Risk ProfileMarket-linked riskMarket risk varies based on fund and securities
ChargesMay have higher charges compared to mutual fundsGenerally lower charges
Difference Between ULIP and Mutual Funds

ULIP vs ELSS vs PPF

Here is a quick comparison of Unit Linked Insurance Plans (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

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.

  1. Insurance plan
  2. 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:

  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

You can check HDFC ULIP plans on their website.

FAQs on Best Unit Linked Insurance Plans (ULIP)

  1. 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.

  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.

  5. 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.

  6. 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.

  7. 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.

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