What is ULIP – Mutual Fund or Insurance Policy?

ULIP (Unit Linked Insurance Plan) is a two-in-one scheme that makes you an investor of mutual funds as well as a policyholder of an insurance cover. It is a combination of two products of insurance and investment where a part of the money is used as a premium for an insurance policy, whereas the other part is invested in a mutual fund scheme. ULIPs also offer the tax benefit of exemption up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act.

Understanding ULIP – Whether a Mutual Fund or an Insurance Policy

As mentioned earlier, ULIP is both a mutual fund and an insurance policy rolled into one where you invest through a SIP (Systematic Investment Plan) and get a life cover simultaneously. In this multi-faceted product, the corpus amount is split into two parts for meeting different purposes. One portion is used to buy life cover whereas the other part is diverted to allocate mutual fund units for the investors. Therefore, investors have an opportunity to build wealth vis-a-vis an insurance scheme. Alternatively, one can also say that investors get coverage & security against financial emergencies in a scheme that offers capital generation.

Features of ULIP

Investors must clearly understand all the attributes of ULIPs before investing in them. The salient features of the ULIPs are as mentioned below:

• ULIPs are not only insurance plans but also investment products. Hence, the amount of regular money paid by investors constitutes both the premium amount as well the SIP amount
• ULIPs give market-linked returns and not fixed returns as they invest in many money market instruments through a fund scheme. The fund can be equity, debt, or hybrid depending on the asset allocation and this is what mainly defines the value of the ULIP. Investors can decide the type of ULIP they wish to invest in
• The premium-cum-SIP payment’s frequency can vary depending on the convenience of the investors. It can be recurring amounts month wise or bi-annual/annual lump sum
• ULIPs have a mandatory lock-in of five years which is the longest among the SIPs

Benefits

ULIPs, apart from maximizing your long-term investments along with life insurance, also come with several other benefits that include tax benefits as well. Let us discuss the advantages of the ULIPs in detail:

1. Life Protection with Capital Appreciation

ULIPs offer the benefit of two products where the investor also becomes a policyholder of a life insurance plan. In case of any unfortunate incident, the nominee is entitled to get the sum insured to the scheme holder. On the other hand, the amount directed towards the SIP of a mutual fund helps in capital appreciation in the long term. Therefore, it is a wealth generating-cum-protection plan.

2. Fund Allocation

Investors can choose the type of ULIPs suiting their risk appetite. The fund schemes can be aggressive with more equity investment or investors can choose to go for conservative schemes with higher asset allocation to debt securities. They can also take a balanced approach through hybrid schemes. So, the SIPs will be directed to the investment channels of the investor’s choice.

3. Size of Life Cover

Investors have the choice to decide the size of life cover they wish to have. They can decide the level of life cover, the policy term, and the premium amount to pay for insurance in the ULIP alongside the fund investment. They can align the premium amount and the policy term with their financial protection requirement and other saving needs.

4. Flexibility

It offers the flexibility of fund switches, top-ups, and partial withdrawals. If a selected fund fails to perform, one can switch to another. This way investors can switch to debt funds during market fluctuations and divert to equities during upswings. This saves them from paying any additional charges or costs for switching between funds that might be levied otherwise. This also helps investors to ride out the volatility during slowdowns and ride through favorable times. It also allows one to partially withdraw the money from ULIPs after a 5-year lock-in period. ULIPs have limited withdrawals and there is a cap on the withdrawal amount as well depending on insurance providers and invested amount. One can also for top-ups by investing more than the base premium, buying more units, and earning more revenue.

5. Tax Benefits

ULIPs have taxation advantages for the investors under Section 80C and Section 10D of the Income Tax Act, 1961. Investors are tax-exempt up to Rs. 1.5 Lakh of the premium paid in a year (under Section 80C). After maturity, the total payout is exempted from tax (under Section 10D) as ULIPs are insurance products. All insurance schemes can avail of the tax benefits under Section 10D, be it the maturity payout or death benefit payout. There is no specific upper limit to this exemption and accrued bonuses are counted for exemption as well.

Wrapping it up:

ULIPs, an insurance plan with a mutual fund scheme offer a dual advantage in one solution. The term ‘Unit Linked Insurance Plan’ is indicative that it is an insurance policy that is market-linked and invests in money market securities like debt and equity. Investors can explore ULIPs to enjoy multi-features and advantages in one scheme, which are life risk coverage, long-term capital growth, and tax benefits. ULIPs are ideal for goal-based planning like wealth creation, child’s education, and retirement fund. It helps in adding financial security to the family and meeting long-term financial goals simultaneously.