ULIP (Unit Linked Insurance Plan) Meaning
The full form of ULIP is Unit Linked Insurance Plan . A ULIP plan (Unit Linked Insurance Plan) is a type of life insurance product that provides insurance coverage to the insured as well as the benefit of investment returns.
In a ULIP plan, a part of the premium paid by the insured is used to provide insurance coverage to the insured’s family while the other part of the premium amount is used to invest in market linked securities. The policyholder has the freedom to choose the option to invest in securities available in the market. He can choose to invest his premium in securities like equity, debt, money market funds etc. as per his wish.
ULIP (Unit Linked Insurance Plan) provides life insurance coverage to the insured as well as investment convenience opportunities. That is why ULIP plans are considered a popular investment option. Along with this, ULIP also gives you the benefit of tax savings under section 80C and 10(10D) of the Income Tax Act.
Benefits Of Investing In ULIP (Unit Linked Insurance Plan)
Unit Linked Insurance Plan (ULIP) as a hybrid insurance product offers a host of benefits. Now we will know in detail about the different types of benefits available in ULIPs.
- Freedom to choose life insurance option:
A ULIP plan (Unit Linked Insurance Plan) provides policyholders the option to choose the life cover amount as per their wish. Most of the ULIP plans offer the policyholder a life cover equal to 10 times the annualized premium. However, this life cover amount may vary from one insurance company to another in ULIP plans. You can assume that a ULIP plan (Unit Linked Insurance Plan) offers you a sum assured coverage ranging from 10 times to 40 times your annual premium.
- Freedom to choose investment type:
There are mainly three types of funds offered for investment in a ULIP plan (Unit Linked Insurance Plan) – Debt, Equity and Balanced Fund. Policyholders can choose to invest their funds in any of these as per their requirement and benefits. Policyholders can choose to invest in any of these funds as per their choice depending upon their risk appetite and the returns they can expect to receive on investment in these funds .
ULIP plans (Unit Linked Insurance Plans) offer a lot of flexibility to a policyholder. Policyholders in a ULIP plan can choose to switch between funds as per their need and convenience. Policyholders can easily invest their funds from one place to another whenever they want depending on the market conditions.
A ULIP plan (Unit Linked Insurance Plan) also provides the facility of liquidity to the policyholder. Usually a ULIP plan comes with a lock-in period of 5 years. Thereafter, the policyholder can make partial withdrawals from his ULIP investment for his financial needs.
- Opportunities for Goal-Based Planning:
A ULIP plan (Unit Linked Insurance Plan) provides a good opportunity to the policyholder for goal based planning. Generally a ULIP plans are designed with an aim to meet long term financial objectives. A ULIP plan (Unit Linked Insurance Plan) helps a person to meet his/her financial goals in life. Like- children’s education, retirement planning, wealth creation etc. Apart from wealth creation through a ULIP plan, one can easily face any financial troubles in the future through a ULIP plan.
- Tax Benefits:
A ULIP plan (Unit Linked Insurance Plan) provides you life protection as well as investment. Also, on the premium paid in a ULIP plan, you can also get tax exemption under section 80C of the Income Tax Act 1961 and 10(10D) on investment returns.
How Does ULIP (Unit Linked Insurance Plan ) Work ?
Unit Linked Insurance Plan as a financial instrument provides life protection benefits as well as investment benefits to the policyholder. A ULIP plan offers the policyholder the option of investing in market related securities such as equity, debt and balanced funds to generate investment returns over the long term. Policyholders are free to choose their investment option in any of the funds as per their risk appetite and investment objectives.
A ULIP plan (Unit Linked Insurance Plan) is considered a good financial product for wealth creation. In a ULIP plan, half of the premium amount paid by the policyholder is used to provide life insurance coverage to the policyholder’s family while the other part of the premium amount is invested in market linked securities like equity, debt, balanced funds etc. of the policyholder’s wish. Investments are made accordingly.
- Read Also Endowment Policy
The funds invested are managed by the fund manager of the insurance company. Hence there is absolutely no need for the policyholder to track his investment. A ULIP plan (Unit Linked Insurance Plan) provides the policyholder with an option to invest in a range of low risk to high risk. Policyholders are free to park their investments in any of these funds as per their risk appetite and returns.
Also the investment made through a ULIP plan (Unit Linked Insurance Plan) gives the policyholder the option to switch his investment from one fund to another to maximize his returns considering the market volatility and risk involved. Through which he can switch his investment from one fund to another according to the market.
Types Of ULIP (Unit Linked Insurance Plan)
There are many types of ULIPs available in the life insurance market. You can choose any of the ULIP plan (Unit Linked Insurance Plan) types as per your requirement. Now we will discuss the types of these ULIP plans (Unit Linked Insurance Plan) in detail below.
- Retirement :
In this type of ULIP plan (Unit Linked Insurance Plan), the policyholder has to pay the premium while in his job. This premium gradually accumulates into a corpus amount, which is paid as annuity from this accumulated amount after retirement to the policyholder. If the policyholder wishes, he can choose the payment options according to his need at the time of taking the policy.
- Money Collection:
ULIP plans (Unit Linked Insurance Plans) are specially designed for the purpose of wealth creation over the long term. Wealth creation through ULIP plans is recommended for individuals who are young and aware to secure their financial goals in the future. Through this plan, you can get adequate circular security for your old age in your youth itself.
- Education of children :
Every parent wants to secure the future of their child financially so that they do not face any kind of financial trouble in their life. There are many ULIP plans in the insurance market today that give you the option of exiting the investment after a specified time interval. You can easily meet the needs of your children through this. A Child ULIP plan (Unit Linked Insurance Plan) enables your children to take care of all their financial needs even in your absence.
ULIP (Unit Linked Insurance Plan) Fees And Charges
While taking a Unit Linked Insurance Plan, you also need to be aware of the charges levied in the ULIP plan. A ULIP plan requires the policyholder to pay various types of charges. The charges to be paid in ULIP plans can be broadly classified into the following types-
- Death Fee:
The mortality charges in a ULIP plan (Unit Linked Insurance Plan) depend on a variety of factors. Like- Sum Assured, Age, Policy Term etc. To get the death benefit in a ULIP plan, you have to pay some charges to the insurance company.
- Premium Allotment Charges:
A certain percentage is deducted as premium allocation charge from the premium paid in the initial year of the ULIP policy as premium allocation charge. A premium allocation charge consists of intermediary commission expenses, initial and renewal expenses.
- Switching Fund Charge:
Most ULIP plans allow the policyholder to switch between funds up to a certain number of times in a year free of cost. But switching to any other type of funds may cost you Rs 100 to Rs 250 per switch.
- Fund Management Charges:
In a ULIP plan (Unit Linked Insurance Plan), a fund management charge is charged by the insurance company for managing various funds. This fund management charge is collected from the policyholder every year.
- Policy Administration Fee :
A policy administration fee is charged for administering the policy and is received every month by canceling units from the chosen fund. Policy administration charge is levied on the policyholder at a fixed rate or as a percentage of the premium amount.
- Partial Withdrawal Fee :
Policyholders can make partial withdrawals under a ULIP plan after the completion of the lock-in period of 5 years in a ULIP plan. Some ULIP plans (Unit Linked Insurance Plan) offer unlimited withdrawals while some impose certain restrictions on it which is limited to 2 to 4 withdrawals. If you withdraw more than this, you have to pay partial withdrawal charges.