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Understand how ULIPs are structured

During any financial turmoil, most individuals realize the importance of savings and insurance. Having an investment and insurance are both crucial parts of monetary decisions, which when taken right, can be quite fruitful. When it comes to investment and insurance, there is a financial instrument that does both. If you invest in a Unit Linked Insurance Plan (ULIP), you get life insurance and investment, both in one plan. It is important to know the meaning of ULIP and understand its basic structure before investing in it.

Meaning of ULIP

ULIP is a type of life insurance, where just like any other life insurance type, you are required to pay premiums to be covered by the policy. When you buy one, the premiums that you pay are divided to serve two purposes. One part of the premium is utilized towards the life insurance component of the plan, while the other part is invested in funds of your choice. If the policyholder loses their life during the duration of the policy, the nominee receives a sum assured as per the policy. On the other hand, if the policyholder has survived the plan, he gets his investments along with the returns he made on them. The life insurance part of a ULIP takes care of the financial security of your loved ones in case of your sudden demise. The investment part ensures that you get good returns on your investments. If one is invested in ULIP for the long haul, they can easily achieve some of their financial goals with the returns they get from a ULIP. Use a ULIP calculator and invest according to your financial goals. With the help of compounding, one can generate sufficient wealth over the years.

Understanding the structure of ULIPs

The insurance part of ULIP is simple to understand, as it works like any other life insurance. If within the duration of the policy, the policyholder loses their life, the nominee will get the sum assured. While the investment part of a ULIP allows you to invest in funds of your choice. Based on your risk appetite, there are broad types of ULIPs:

  • Equity-based funds
    In equity-based funds, your money is invested in equity and equity-based products. These funds have high risks, which are usually rewarded with high returns. People who will take risks usually invest in equity funds.
  • Debt-based funds
    If an individual does not want to invest their money in any risky funds, they would put their money in debt funds. Debt funds are low in risk since the money is invested in government and corporate bonds. The returns are lower than equity funds, as the risk is also low.
  • Balanced funds
    If an individual wants to receive moderate returns and is ready to take moderate risks, balanced funds are the ideal choice. With balanced funds, the money is partly invested in equity and partly in debt. This ensures that the risk is balanced and so are the returns.

One of the most remarkable features of a ULIP is that one can switch amongst these investments whenever one wants. This is a rare and useful feature as it allows the investor to make the most of the market fluctuations. Use a ULIP calculator to ensure that you invest in a goal-oriented manner and maximize your returns. Also, choose between different types of ULIP based on the returns you want. ULIPs usually have a lock-in period of five years. This ensures that people inculcate a habit of savings without withdrawing from their investments now and then. After the lock-in period, most ULIPs allow free partial withdrawals. The free partial withdrawals are quite handy to individuals when they urgently need funds.

Since ULIPs have the component of insurance and investment, there are several charges that are associated with ULIPs. Some of the common charges are premium redirection, policy administration, mortality fees, fund management charges, premium allocation charges, and miscellaneous charges. Earlier, when ULIPs were launched, these charges were quite hefty and kept people from buying ULIPs. Whereas, now these charges have come down drastically, leading to more and more people investing in ULIPs. Also, ULIPs have tax benefits of multiple levels because of their unique structure. The ULIP premiums that you pay are exempt from taxes. Also, the sum assured and the coverage you receive enjoy tax benefits as well.

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