What are Unit-Linked Insurance Plans (ULIPs)?

Buying an insurance plan/policy is essential to make yourself financially secure to face any unexpected or sudden problems in life. It provides a cover against any sudden loss. However, did you know that there is a financial product that combines insurance and investment benefits in a single plan?

Unit-Linked Insurance Plans (ULIPs) provide a mix of both life insurance and investment. Insurance companies offer ULIPs so that their clients can get life cover and also reap the benefits of investing in equity and debt funds. It creates a habit of regular and disciplined savings.

How Does it Work?

When you buy and hold a ULIP policy, you’ll have to make regular premium payments. A part of this premium is utilized to provide life insurance coverage. The remaining amount is pooled with the assets received from other policyholders and then invested in equity, debt, or even hybrid funds. [A hybrid or balanced fund is a financial instrument that invests in a mix of both equity and debt segments in a specific ratio]. A professional fund manager looks after the investments made by all policyholders.

ULIPs give investors the option to switch between equity and debt funds based on market conditions and their risk-taking capacity. The gains from such schemes will be taxed the same way as most mutual funds are taxed. 

Tax Benefits:

Interestingly, investments made in ULIPs can be used to claim a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. The returns from the policy are also exempt from taxation on maturity (up to Rs 2.5 lakh) under Section 10 (10D) of the IT Act. If the ULIP investor dies during the term of the ULIP, their nominee will be entitled to the death benefit specified in the ULIP policy, and the amount received on death is exempt from tax.

Lock-in Period & Charges:

ULIPs come with a mandatory lock-in period of five years. It means that you can withdraw your ULIP policy only after five years from the date of investment. There are no provisions to make a premature exit. After five years, you can redeem the full amount. Since ULIPs are a combination of a life insurance policy and a mutual fund (which are long-term investments), it is advised that one should hold a ULIP policy for 15 years or more.

When a person subscribes to a ULIP, the insurer levies a charge for insurance protection upon his death and to cover other expenses. This is known as the mortality charge. It is usually deducted along with other charges before investing the policyholder’s money.

The expense ratio (or annual maintenance charge levied by fund managers) is mostly in the range of 1.05-2.25%. 

Before investing in a ULIP, do proper research on the product and analyze all the charges levied. Generally, it is better to keep insurance and investing separate.