Unit Linked Insurance Plans: 3 Things You Need to Know About It

Unit linked insurance plan , also known as ULIP plan, is a blend of insurance and investment. It is a type of plan that gives you a dual benefit of insurance protection along with investment opportunity to create wealth to achieve long term financial goals.

The premiums you pay for your ULIP plan will be partially allocated to pay for your life insurance cover. The remaining amount is invested in fund-based debt or equity as per your risk profile. When you are choosing the asset class for investment, make sure they match your long-term goals like child’s education, marriage, retirement, etc.

Unlike mutual funds, assets in a ULIP plan are managed to reach a certain objective. The net value determined by unit linked insurance plan is linked to the market, which appreciates with the increase in value. When you buy units in a ULIP, you are not the only one investing in that unit. There are many others like you. Investors can buy their shares for a single fund or diversify across multiple funds as per their preferred risk.

How does a Unit Linked Insurance Plan work?

A unit linked insurance plan combines the benefit of life insurance with investment. For these plans to provide some real market-linked benefits, you must stay invested for at least 5-years, which is also the policy’s lock-in period.

The premiums paid towards the plan get adjusted for applicable charges that are revealed to you before you buy the policy. The remaining premium is then invested in a fund of your choice – debt, equity, hybrid, etc. You can check the Fund Value to know the size of your corpus.

Upon policy maturity, you are paid the fund value. However, if the policyholder passes during the policy term, the sum assured is paid to the nominee as per the chosen option.  

According to experts, if you truly want your unit linked insurance plan to make your money work hard for you, you must remain invested for at least 10-15 years. In the first few years, a large chunk of your premium is used to pay for expenses, such as low fund value.

In the later stages, the premium is divided into investment and insurance. The investment component of your premium will be invested in funds of your choice that can be debt, equity, or both.

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Benefits of unit linked insurance plan

Here are some reasons why you should consider investing in the ULIP  plan:

Dual benefit 

A unit linked insurance plan is preferred over other life insurance products because of its ability to secure your financial future and earn you wealth. It is a type of plan that not only protects you but also gives you returns.

Meet your long-term goals

If you have long-term goals, like buying a car or a house, then the ULIP plan is a good investment because it helps in wealth creation, if you invest for an extended period of time.

Flexibility to switch funds

Unit linked insurance plans give their investors the flexibility to switch the funds in their portfolio based on market performance and their ability to take a risk. You do not have to stay stuck with a fund that is not working as you expected it to work. You have the freedom to choose and manage your investment options as per your preference.

Tax benefits

For those who want to know how to save tax with ULIP , there is good news! The premiums that you pay towards your policy are eligible for tax savings u/s 80C. Even if you make short term gains, by switching between funds will be tax exempted. Moreover, the returns from this policy at the time of maturity are also tax exempted u/s 10(10D).

Tips to make the most of your ULIP plan

Here are some things you can do to get the most out of your ULIP plan.

Stay invested for long

The thing about unit linked insurance plans is that the longer you stay invested, the greater your returns will be. They do not provide quick returns and are not an ideal investment vehicle for short-term goals.

Know your prime objective

You should choose the right sum assured for your life insurance cover to protect your loved ones against life’s eventualities. You should work out the relevant life cover based on your age, income, and dependents.

Take top-ups

You can also top up your policy with an additional amount over your regular premium to enhance the investment component of your primary policy.

Make partial withdrawals

ULIPs allow you to make partial payment withdrawals after the completion of 5 years. It helps you cater to your emergency requirements without depending on loans.

Now that you know everything there is to know about a unit linked insurance plan, it is time to browse the plans online and choose the one most suited to your needs.

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