What is ULIP or Unit Linked Insurance Plan?

A ULIP or Unit-Linked Insurance Plan is one of the most popular insurance-investment plans and equally misunderstood. It is one of the best plans suited for long-term financial planning. If you’re also confused about ULIP, then this article is for you.

Here, we will look at ULIP meaning, benefits and how to choose the best ULIP plans in India.  

What is ULIP?

A Unit Linked Insurance Plan or ULIP is one of the best investment plans to consider in India. ULIP comes with the dual benefit of investment and insurance. In other words, one part of your ULIP premiums goes towards the insurance policy and the remaining portion is used for investment in market-related options, such as stocks, shares, bonds, equity, etc. for wealth generation.

How does a ULIP work?

In a Unit Linked Insurance Plan or ULIP, the money invested by all the policyholders is pooled and put into funds chosen by them. After the money is invested, the total amount is split into ‘units’ with a specific face value. Each investor is then given ‘units’ proportional to the amount invested.

The value of each unit at any point in time is called Net Asset Value (NAV). The increase or decrease in the value of the assets is reflected by this NAV.

Benefits of Investing in ULIP

Unit Linked Insurance Plan or ULIP comes with numerous benefits. Some of these are:

• Financial Security

Unit Linked Insurance Plan or ULIP plan provides you and your loved ones with a financial safety net and ensures you are better equipped to face financial struggles, if any, in the coming years.

Unit Linked Insurance plan will ensure that you are able to fight the rising cost of inflation and are able to achieve your long-term goals.

• Tax Benefits 

One of the key advantages of investing in ULIP is its tax-saving capacity. Under this plan, you can claim up to Rs. 1.5 lakhs of tax benefits in one financial year under Section 80C of the Income Tax Act, 1961.

• Lump-Sum Death Benefits 

Investing in a Unit Linked Insurance Plan or ULIP plan provides your loved ones with lump-sum death benefits. This will ensure that your loved ones do not have to come across any financial constraints even when you are not there to back them up financially and can achieve their goals without any hassles.

• Flexibility to Choose Fund Options

With ULIP, you can choose to direct your money towards the funds of your choice. You can analyse the risk you are willing to take and invest your money in the options accordingly. You should keep in mind that the return you will get on the investments directly will depend on the performance of your investments in the capital market.

• Flexibility to Choose Premium Payout Option

Unit Linked Investment Plan or ULIP provides you with the flexibility to choose how you want to pay the premium according to your convenience. You can choose to pay premium monthly, half-yearly or yearly.

• Helps Develop a Habit of Saving Regularly 

Investing in Unit Linked Insurance Plan or ULIP will help you develop a habit of saving, which is quite beneficial in the long run. You will need to pay regular premium unless your policy may lapse. This will act as a motivation to save significantly.

How to Maximize Returns from a ULIP?

Here are some of the ways you can maximize your Unit Linked Insurance Plan returns:

• Invest as early as possible
• Maximize your investment amount in order to reap high returns
• Choose to invest in equity funds
• Make sure to assess your risk appetite before investing
• Stay consistent in your investment

Tips for Investing in ULIP

Here are some tips you can use to get the best out of your Unit Linked Insurance Plan plan:

• Stay Invested

Unit Linked Insurance Plans usually have a lock-in period of 5 years, which is why they make for a perfect option for people looking for a long-term investment. The longer you stay invested, the more you can gain from the power of compounding, which simply means that your money will be reinvested in order to grow year after year.

• Choose Between Debt and Equity Funds

Debt and equity have distinct characteristics. Equity funds usually offer higher returns but also involve higher risk. On the other hand, debt funds are relatively stable and pose a lower risk. Choosing debt funds can reduce the risk factor of your ULIP investment. Therefore, creating a balance between equity and debt funds is essential.

• Optimize Your Asset Allocation

A ULIP plan offers an option to switch among various assets. The best way to optimize asset allocation is to invest across different classes of assets. It can help save you from the losses you may incur in case you stay invested in a single asset class.

• Align Your Investment with Long-Term Goals

People usually invest in a ULIP plan for wealth creation and save for investments such as buying a house, retirement, and a child’s education. Your financial goals play a vital role in deciding your risk appetite.

Taxation Rules of Unit Linked Insurance Plan

ULIP premiums are eligible for tax deductions under section 80C of the Income Tax Act of India, for up to Rs 1.5 lakhs/financial year. The deduction is restricted to 10% of the capital-assured sum.

Also, section 10(10D) provides a tax exemption on any amount received under a ULIP plan, which includes the sum allocated by bonus.

However, if the premium paid is more than the prescribed limits, there will be no exemptions provided except in the case of the investor’s death.

ULIP: FAQs

Read more: Top 10 Best ELSS Funds in India.