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How ULIPs Work?

Published On Nov 21, 2021

A unit-linked insurance plan (ULIP) is a unique insurance plan that meets fundamental insurance needs and priorities while also serving as an investment vehicle. It has the ability to transition from an equity to a balanced fund, as well as enable emergency withdrawals. As a result, a ULIP can be employed as a long-term investment, as well as an accumulation and withdrawal strategy (pension and annuity).

Many investors abandon their ULIP before it reaches its full potential due to a lack of understanding of the benefits and fallacies surrounding it. The insurance component, for starters, gives investors peace of mind. ULIPs offer a built-in lowering balance sum guaranteed feature, which allows your investment to continue and your goals to be met even when you are not present. It's a dynamic mix of high-potential returns, systematic investment plans (SIPs), top-ups, tax benefits, premium waivers, and the ability to swap between an asset mix of equity and debt using the same policy, among other benefits.

How Do ULIPs Work?

With a long-term investment in ULIPs, there are various benefits that automatically arise:

1. Insurance Plus Investment

A ULIP combines insurance and investment to provide a secure road to wealth building with the added advantage of life insurance, which addresses two major concerns for most people. In addition, the insurance coverage has a longer term, which gives you more peace of mind.

2. Benefits Of Long-Term Holding Loyalty

When compared to investments held for a shorter duration, those held for a longer period tend to have lower levels of volatility. The lock-in term of a ULIP provides the discipline needed to stay invested, especially in a tumultuous market where investors are tempted to sell out. It will reward you with loyalty and wealth boosters that will raise the fund value and maturity corpus if you stay committed for the long term.

3. Systematic Investment Plan (SIP)

A ULIP combines the advantages of a SIP with the flexibility of a ULIP. With the benefit of the average cost, the investment amount is reduced. SIPs allow you to develop a wealth-building portfolio by investing over a longer period of time.

4. Switching Between Funds Flexibility

ULIPs provide you the freedom to choose between funds at any time, depending on your risk appetite, which is likely to change as you get older. A ULIP's vast range of investing methods and alternatives allows for different levels of equity and debt securities exposure. Without having to depart the policy, you can switch from a higher to a moderate to a low equity participation level.

5. Premium Waivers

Aside from capital growth and life insurance coverage, several plans provide unique advantages. Most kid plans, for example, have an inbuilt mechanism that permits the premium to be waived without impacting the plan's validity in the event of the parent's untimely death.

6. Tax Benefits

The investment, earnings, and withdrawal phases of insurance are all eligible for tax deductions. Section 80C of the tax code allows you to deduct the premium. Partially withdrawn funds, as well as the maturity amount, are tax-free. Section 10 (10D) of the Income Tax Act exempts returns from income tax if they are received before the policy's maturity date.

7. Liquidity Crunch Protection

Life is full of unexpected events. However, not everyone has enough liquid assets, and liquidating long-term assets has a negative impact on portfolio returns, not to mention the tax and other charges. A ULIP can be a lifesaver when it comes to partial withdrawals from accrued funds after the lock-in period has expired.

8. Increased Investment Ease

Consider the case when you desire to increase the size of your ULIP's maturity corpus by making an additional investment. You can acquire a ULIP for a cheaper premium or top it up later in the policy's term if you have extra money. The same tax advantages apply to top-up premiums as they do to regular premiums.


ULIPs are a type of investment that can meet a variety of financial objectives and goals while also addressing the main concerns of capital growth and life insurance. This makes it a good candidate for inclusion in your portfolio, especially if growth and protection are important to you. A ULIP, like your smartphone, multitasks to make your life easier.

Also read: 10 FAQs About ULIPs

Is ULIP a better investment than mutual funds?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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