Simplifying ULIPs for you

ULIPs have been acquiring a lot of prevalence among investors over the past few years. Many investors have shown a keen interest in ULIP schemes in anticipation of higher returns in the future. Wondering what ULIP means? Here’s a quick brief on what ULIP is, its various policy options, and the benefits that investors can avail.

What is a ULIP policy?

A ULIP or Unit Linked Insurance Plan is an investment cum life insurance instrument that helps one create assured life term investments in the long run. A ULIP policy helps individuals create long term wealth, which can help them work towards building their dream home or saving to pay for education or retirement. Additionally, ULIPs also ensure that all these goals are achieved despite the uncertain and unforeseen events that may occur, with guaranteed life insurance.

ULIPs help individuals invest their savings in different types of funds, including a mix of debt and equity, according to their risk appetite. The premiums that are required to be paid are deducted based on the taxable income, in accordance with the tax deduction rules under Section 80C of the Income Tax Act, 1961. On the other hand, the returns on a ULIP are tax-free, as mentioned under Section 10(10D) of the Act.

How do ULIPs work?

Now that we have a fair idea of what a ULIP is, let’s get into how a ULIP works. In simple terms, a ULIP can be considered an investment as well as an insurance policy. The insurance policy is associated with a benefit which, in simple terms, is the amount that the policy holder’s nominee receives in case the life assured faces any uncertainties during the period of the policy.

It must be noted that the account holder for the entire tenure of the ULIP policy can get the final maturity value of the ULIP at the end of the tenure, which will be the amount that has been acquired by the ULIP investments in the form of equity or debt.

One of the most striking features of a ULIP is that the individual has the choice to select the policy funds and assets from where they want to generate returns on the investments. If the value of the investments is less than the actual sum that was assured in the ULIP policy, the nominee will be paid the insurance amount.

Types of ULIPs

There are various types of ULIPs, categorised based on the following factors:

  • Type of funds
  • Wealth creation

Based on the type of funds

ULIPs are based on different types of funds to suit individuals that wish to invest in other financial instruments apart from equities. The following is a list of ULIPs based on the type of funds an individual wants to invest in:

  1. Equity: In this, the investor purchases equity shares from one or more companies. These equity shares tend to be a lot riskier due to the fluctuations in the financial markets.
  2. Debt: Funds under such ULIPs are invested in debentures or bonds, which do not carry as much risk as equity shares.
  3. Liquid funds: The investors’ funds are invested in liquid money market instruments such as treasury bills, certificates of deposit, or call money. The maturity period for such funds is much shorter compared to the others and is the perfect solution to fulfil short-term financial goals. Liquid funds are also advisable to those who have a low risk-bearing capacity as ULIPs under such funds have strong credit ratings.
  4. Balanced funds: This includes investing in both equity and debentures by allocating a part of the funds in equity and the other part in debentures. This ensures an even spread of the risk, thus offering a more stable return.
  5. Cash funds: Under cash funds, the instruments include term deposits, cash deposits, etc., which have very low risk. This is a perfect choice for risk-averse investors.

Based on wealth creation

Such funds are created mainly for generating higher returns

  • Single premium and regular premium
  • Life-staged ULIPs
  • Guaranteed and non-guaranteed ULIPs

To sum up, ULIP plans are an all-in-one package with varied options that are created for all types of investors based on their risk tolerating capacity.

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