What Is Meant By a ULIP?

Unit-Linked Insurance Policies are insurance plans that provide the policyholder with two benefits viz., life insurance coverage and fund investment in the capital market. The premium paid by the policyholder is segregated into two parts. The smaller portion of it is set aside for providing the life insurance of the policyholder. The other larger portion is directed towards investment in the capital market. 

The insurer pools the premium paid by different policyholders and forms a single common fund. He invests this fund in different shares, debt funds, or in a balanced mix of both, according to the decision of the policyholders. The total premium is divided into units that are attributed with a specific value. The policyholders are allotted with these units which are proportionate to their premium investment. Therefore, the returns earned by the funds in the market are distributed to the policyholder according to these units. 

Example

Ramesh pays a premium of 50,000 and buys a ULIP. Another investor, Ravi, contributes 30,000 for a ULIP. Basic costs like Mortality charges, fund management charges, etc are deducted from the premium. After deducting these charges, Ramesh's premium equals Rs. 49,500 while Ravi's premium becomes Rs. 29,500.

Thus, the total amount the insurer can invest in the funds is 49,500+29,500 = 79,000. Now, the insurer makes units, with a face value of Rs. 10 each. 

Therefore, the total number of units will be 79,000/10 = 7,900.

With Respect To this face value, Ramesh holds 4,950 units as his contribution is 49,000. Similarly Ravi's units will be 2,950.

The returns for the ULIPs highly depend on the market performance of these funds. Hence the sum earned by the policyholder is reliable on the number of units and market performance of the funds.

Benefits

• Switching Of Funds: An individual can choose to invest his funds in equity funds or debt funds or a mix of both named as balanced funds. The ULIPs have a compulsory lock-in period of 5 years. The policyholder is allowed to switch funds after this period as per his wish and will. Switching of funds helps in taking advantage of the market fluctuations in the fund value.
• Tax Benefits:  The Income Tax Act, 1961, provides certain tax exemptions on ULIPsYou are exempted from the payment of tax on your premium, if it is less than Rs. 2,50,000. The debt-equity switches are also tax-free. Under section 10(10D), the maturity benefit is also made tax free( conditions apply).
• Liquidity: ULIPs also provide an option called partial withdrawal. This option enables you to withdraw a part of the money invested in your policy. This amount can be utilized to meet immediate expenses such as a child's graduation fees, family vacation, etc.

Conclusion 

The ULIPs are best suitable for a long-term investment for those persons with certain goals and risk appetites. The longer the funds stay invested, the higher would be the returns. Therefore it is advised to opt for ULIPs, only when the individual has a specific long-term goal to be fulfilled. The choice of the policy depends on the financial circumstances, income, risk appetite, and goals of the individual. It is always recommended to know the terms and conditions of the policy before opting for it. 

Also Read:- Know How ULIP Returns are Calculated

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.