Understanding Basics of Unit Link Insurance Plans
We already know that there are different kinds of insurance plans in the market. Each of them serves a specific purpose and are meant for different people. One such plan is ULIP, which offers both insurance cover and investment plan in the same scheme.
ULIP is short for the unit link insurance plan. The premium paid is divided into parts to provide insurance cover and to be combined with other’ premiums to be invested in various equity and debt markets. The payouts of ULIP can be used for insurance, retirement, and other expenses.
In a way, this is much similar to how mutual funds work. You can switch between equity and debt funds based on your risk tolerance level. You can inform your fund manager about your decision, and the changes will be made based on the terms of the plan.
When you buy ULIP, you will have to initially invest a lump sum amount. After that, you’ll have to pay premiums monthly, semi-yearly, or annually. The premium amount will depend on how much you wish to get back in return. ULIPs are classified based on where the funds are invested.
Equity funds: A portion of every policyholder’s premium is separated. These are then clubbed together to form a larger amount. This money is invested in equity markets for more returns (at higher risk).
Debt funds: The same procedure is followed here, except that the funds are invested in the debt market. The returns are low, and so is the risk quotient.
Balanced funds: This is a preferred choice if you want decent returns with moderate risk. The funds are equally invested in both equity and debt markets. The volatility of one is balanced by the non-risky nature of the other.
Investing in ULIP has more than one benefit. There’s no wonder these are popular in the market.
- Being insurance cum saving plans, the biggest advantage of ULIP is the life cover it provides to the policyholder. The amount will be handed over to the beneficiaries in case of the policyholder’s demise.
- ULIPs are meant for long term investments. Think of 10-15 years when you invest in this plan. There is a lock-in period of 5 years, after which you can exit and cash in your policy.
- Since ULIP comes under insurance schemes, the amount you pay as a premium can be exempted from tax under Section 80 C (up to Rs. 1, 50,000/-).
- As we mentioned above, you can switch your investment from one fund to another. You can move between equity and debt to minimize risk or maximize returns. This flexibility is not available with regular insurance plans.
ULIPs offer good payouts if you tide over the market volatility. The long duration gives you a chance to balance the risk factor with market fluctuations and reward you with handsome returns.