What Is ULIP? Know All About It in This Guide

If you came across the term ULIP and wondered what it is, here is the answer. A ULIP or Unit-Linked Insurance Plan is a security-linked investment product with insurance capabilities. So an investment in the best ULIP plans can provide the benefits of insurance and security investment. Read more about them in detail with their eligibility, features, and functioning.

What Is ULIP?

A ULIP meaning a Unit-Linked Insurance Plan, is an investment product with insurance benefits. It specifically invests in nationalized security bonds and provides returns based on the investment’s performance. Simultaneously it also provides all the conventional benefits and returns of a life insurance policy. The best ULIP plans can provide interest rates much higher than any other mode of insurance, on par with the returns from stock market investments.


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What Is the Eligibility to Purchase ULIP?

There are no specific eligibility criteria for ULIP plans as per the ULIP guidelines from IRDAI. Any resident of India with no legal complications can apply and purchase a ULIP plan. The age restriction is similar to life insurance, between 0 to 60 years. Only in the case of retirement ULIP plans is the minimum age required to purchase a policy is 18 years.

What Are the Features Of ULIP?

The features of ULIP plans are mostly similar to life insurance but with several other beneficial returns to the investor. Given below is a brief description of the highlighted features in the best ULIP plans.

Market Dependent Investment

As the ULIP plans invest the premium into securities such as funds, bonds, cash funds, balanced funds, fixed interest funds, and income funds, the returns usually fluctuate. So the growth of the invested capital will depend on the product’s performance.

Fluctuating Interest Rates

As the plans have links with market-dependent investments, their interest rates are also market-dependent. So, the final interest cannot be known earlier and will depend on the market condition at maturity or claim request. Such funds can also provide much higher interests if the invested security performs well.

Guaranteed Capital

A great benefit of ULIP plans is that most of them provide a guarantee on the invested capital. So even if the products underperform, there are no effects on the investment. This is a rare feature not seen much in investment products. But sometimes, the insurer does not ensure guaranteed capital. As a result, there are risks on the invested capital in the form of premiums when the product underperforms. So, it is always good to ensure the guarantee on capital and interest rates in the policy documents before purchasing the ULIP plan.

Personal Selection Suitable Bonds

The selection of the funds to distribute the premium of ULIP are totally dependent on the policyholder. So they have to mention which fund to invest in and how much fund is allocated with each fund. There is no restriction in the choices or percentage share of the fund selection.

High Tax Savings

The tax savings on ULIP plans are also very high. It has a similar INR 1,50,000 per annum deduction on annual premium payments. But it also provides tax-free mortality and maturity benefits. These benefits are tax-free as long as the premium amount for the plan remains below INR 2,50,000 per annum. Any investment in ULIP plans above that limit will grab income tax on premium payment and return benefits.

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How Does ULIP Work?

As mentioned earlier, ULIP plans are investments products that work similarly to insurance policies. But its functioning is only describable through the stages of investment. Given below is how a ULIP works based on various key stages.

Bond Selection Based on Own Risk Appetite

The bond selection is totally up to the policyholder. So, when they choose a bond as per their risk appetite, the insurer diverts those instructed percentage of investment into the selected bonds.

Higher Returns from Risky Investments

With the increased risk appetite, the investments also can increase substantially. But so does the risks increase. There are chances that higher risks can totally deplete interest rates.

Affected By Fluctuating Markets

This fluctuation effect is totally dependent on the fluctuating market and the product’s performance. So, if a product performs well, the ULIP will reflect that, and if it doesn’t, the ULIP will underperform.

Occasional Loss of Investment

Sometimes this underperformance of the product can even lead to a loss of invested capital. So, investing in a ULIP plan is risky, but choosing the best ULIP plans and knowledgeable selection of binds can minimize the risks.

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