A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan. So a ULIP is basically a combination of insurance as well as investment.
The first ULIP was launched in India in 1971 by Unit Trust of India (UTI). In 2005, Insurance Regulatory and Development Authority, now Insurance Regulatory and Development Authority of India (IRDAI) issued major guidelines for ULIPs.
How it works?
Like a premium is paid for an insurance policy, same way a premium is paid under ULIP. The difference lies in the part that a part of the premium paid is utilized to give insurance cover to the policy holder and the remaining part is invested in various equity and debt schemes. The policy holder can select between debt and equity or he can invest in a mixture of two. Just like mutual funds, the money collected for investment forms a pool of fund and then the investment is done. ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.
Key points of a Unit Linked Insurance Plan:
- Unlike, Mutual Funds, a Unit Linked Insurance Plan give you a long-term plan.
- ULIP allows the policy holders to switch their investment between the funds linked to the plan. This enables them to change the risk return.
- There is a minimum lock-in-period, i.e. the policy holder will have to stay in the plan for that period.
- Though he can partially withdraw from the fund with some charges and conditions.
- All Unit Linked Plans offer tax benefits under section 80C.
- The investments made are subject to risks associated with the capital markets. This investment risk is to be borne by the policy holder.
Some of the ULIP providers are LIC of India, SBI Life, HDFC Life, ICICI Prudential, Kotak Mahindra Life, etc.