The Rise of Unit-Linked Insurance Plans (ULIPs) in India

In this article, we will take a closer look at what makes them tick and why you might want to consider adding one to your financial toolkit.  

What is a ULIP?

Let’s skip the confusing jargon and break this down in simple terms. A unit-linked insurance plan - or ULIP, as it’s commonly called—is a two-in-one deal. It is a life insurance policy, a part investment tool. Think of it as that overachiever in your financial toolkit—handling your protection and wealth-building needs at the same time. 

Here’s how it works. When you sign up for a unit-linked insurance plan, you will get a premium amount. Next, you will choose how often you want to pay—monthly, quarterly, or once a year. A chunk of that payment goes toward life insurance coverage. That means if something unexpected happens, your loved ones are financially looked after. 

Now, the rest of the money? It is not just sitting in some dark vault. It is being put to work. Your remaining premium gets invested in funds of your choice - these could be equity funds, debt options, or a mix of both. And here’s the cool part: you are the one calling the shots. Whether you prefer to keep things low-risk or are feeling bold and want to aim for higher returns, ULIPs give you the freedom to tailor your investment game plan to fit your comfort zone and goals. You can even switch things up later if your plans change. 

Benefits of Unit-Linked Insurance Plans

If you are someone who likes your money to do more than one job at a time, then a ULIP might just be your financial match. Here’s why:

1. Dual Benefit in One Plan

You can get both protection and growth aspects in unit-linked insurance plans. As mentioned above, a portion of your premiums goes towards life insurance, securing your dependents’ financial future, while the rest is invested in market-linked funds that can help build your wealth over time. 

2. Tailored Investment Choices

You do not have to follow a one-size-fits-all route. With ULIPs, you can decide where your investment money goes depending on how comfortable you are with taking risks and what your long-term goals are.

3. Flexibility to Switch Funds

Markets change, and so do your financial priorities. Unit-linked insurance plans let you switch between different funds when needed, helping you stay aligned with your immediate priorities, goals, and market climate without needing a separate backup plan.

4. Goal-Oriented Planning

Whether you are planning to save for your child’s education, planning to buy a new home, or working toward early retirement, a unit-linked insurance plan gives you the discipline and structure to build your savings towards specific goals over the long term.

5. Tax Benefits

The premiums that you pay on ULIPs are eligible for deductions under Section 80C of the Income Tax Act. Plus, the maturity amount could be tax-free under Section 10(10D), subject to certain terms and conditions.

6. Power of Compounding

ULIPs encourage you to stay invested for the long term, allowing you to benefit from compounding over time. The longer you stay invested, the better your growth potential.

In a nutshell: 

Since ULIPs carry a five-year lock-in period, it can benefit investors who spend money destined for long-term objectives on short-term objectives or panic and cash out when the market is falling. 

In an ULIP, up to Rs 2.5 lakh annual premium is tax-free at maturity. Switching between funds is tax-free as well, unlike opposed to any other product that is available today in the market, which has capital gain tax on it. ULIPs are a very suitable product for customers who opt for wealth creation for more than 10 years. 

How to Choose Your Ideal ULIP? 

Now that you understand the benefits of ULIP, let’s help you figure out how to pick the one plan that’s right for you: 

1. Know your goals:  Start by asking yourself what you are aiming for. Is it long-term wealth building? A safety net for your dependents? Funding your child’s future? 
2. Assess your risk appetite:  If you are okay with some market swings, go with equity funds. Prefer stability? Debt or balanced funds could be your thing. 
3. Check the charges:  Check for hidden charges, including premium allocation charges, fund management charges, and policy administration fees 
4. Compare policies:  Check and compare policies on behalf of performance history, flexibility in switching funds, lock-in period, and additional riders. You can use Paybima to make an educated decision.