What Are Unit Linked Insurance Plans (Ulips)?

  Author: Naveen Kumar

In little more than a decade, unit linked insurance plans (Ulips) have become very popular in India. You are bound to have been approached for buying Ulips, especially during the tax saving investment season towards the end of every financial year. So, what exactly is an Ulip all about?

Ulips explained in brief Unit linked insurance plans (Ulips) are life insurance plans provided by life insurance companies. They are primarily investment plans which also provide life insurance. Ulips are flexible investments that help an investor invest in both equities and debt in different proportions offered by life insurance companies. When you stay invested in an Ulip that invests mostly in equities, you can expect to receive the typically high growth that one gets from equity investments in the long-term i.e. over 8-10 years or more. The growth of the money is typically much more than inflation.

The premium for a unit linked insurance plan is used to buy life insurance cover and units in a fund of your choice. These funds, as we have just mentioned invest in a mix of debt and equity investments. Depending on the investment performance, the value of units goes up or down.

Investment risks The risk associated with the investment in an Ulip is entirely borne by the policyholder. It is also a transparent since you get to know how your money is getting invested and how your units are growing. During the term of the Ulip, you can move to other funds through a facility known as the “switching” facility. Typically, up to a certain number of switches every year is free.  

Tax deductions Like other life insurance policies, you get annual tax deduction of upto Rs 1.5 lakh under Section 80C. The death benefits or maturity benefits are also exempt of tax under Section 10(10)D.  

Before investing in an Ulip you need to ask yourself whether you really need a combination of investment and life insurance. You can have the two separately too. For instance, you could opt for a combination of term plan and equity mutual fund. You also need to be aware of the various charges in Ulips. They typically eat into the growth of your money.

If you convinced of the utility of the life insurance and investment combination, Ulips can be a useful in meeting long-term needs like children’s higher education and retirement. On their part, life insurance have specialised Ulips for financing the higher education of children and retirement. They have typical features whose utility needs to be evaluated. Being a long-term financial product like most other life insurance policies, you need to give Ulips a good hard look before making it a part of your life.